Interest rates stuck on hold despite unemployment

Interest rates look set to remain at the same levels for a period of time, even as the jobless rate continues to rise as the economy transitions away from a dependence on mining investment growth.

RBA governor Glenn Stevens told the House Economics Committee that “very accommodative” monetary policy was supporting credit growth and construction in the housing sector.

“We have signalled the likelihood, if the economy evolves more or less as expected, of a period of stability in the cash rate,” Dr Stevens said in his opening statement to the committee, which is sitting in Sydney.

“As well as the low level of interest rates generally, a sense of stability should be of some help for businesses and households as they form their plans.”

But he also warned that there was uncertainty about the handover from mining to non-minig sectors of the economy, even as such a shift appeared to have started.

“Will the additional demand likely to be generated outside mining as a result of these trends be just the right amount to offset the large decline in mining investment spending, so keeping the economy near full employment?” Mr Stevens asked.

“No one can answer that question with great confidence.”

Dr Stevens shied away from talking down the exchange rate further, only saying that jawboning is when he opines that the Australian dollar’s “long-run equilibrium is somewhat lower than what it was trading at the time”.

The governor declined to comment on whether he wanted the currency to trade below US90c, saying that “one can’t be especially precise” but that he stood beside he previous comments on the currency.

Dr Stevens and Dr Lowe said they expected the unemployment rate to rise until early 2015, as population growth continues to outstrip jobs growth and with the labour market data expected to lag economic activity as it improves.

The RBA forecasts the jobless rate to “peak at early 2015 and stay at those levels for a while”, Dr Lowe said, adding that it was “not until late 2015 where there is sufficient [employment] growth in our forecasts”.

“Employment growth [at this time] is not sufficient to bring the unemployment rate down … population growth is still growing pretty strong,” he added.

More to come…

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