By Jacob Greber
Feb. 20 (Bloomberg) -- Australia’s lowest interest rates in 45 years and government spending will stoke the economy, central bank Governor Glenn Stevens said, fueling speculation he will slow the nation’s most aggressive round of rate cuts.
The stimulus “will have a very powerful impact on the economy,” Stevens told parliament’s economics committee today in Canberra. “The effects of the policy adjustments are only just beginning.”
Traders pared bets on the size of further reductions to the benchmark interest rate, which the Reserve Bank of Australia has cut by four percentage points to 3.25 percent since early September. Stevens said policy makers have room to move again if needed to stoke an economy that almost stagnated in the third quarter of 2008.
“He’s encouraged the idea that further cuts in rates in Australia will be smaller and less frequent” in coming months, said Rory Robertson, a Sydney-based economist at Macquarie Group Ltd. “We’ve seen the most aggressive monetary policy moves in Australia’s history to cope with a very weak period ahead.”
The yield on the two-year government bond rose 4 basis points, or 0.04 percentage point, to 2.75 percent after Stevens’ comments. Australia’s dollar traded at 64.20 U.S. cents at 2:07 p.m. in Sydney from 64.46 cents. The S&P/ASX 200 stock index fell 1.3 percent to 3,402.8.
Rate Expectations
Stevens said market participants are “currently toying” with an expectation the central bank will cut the overnight cash rate target by another 125 basis points to 2 percent.
“I have no desire to encourage or disabuse them” of that view today, the governor said. “If there is a need to use more interest-rate stimulus, and that’s prudent, then we can.”
Investors pared rate-cut bets following Stevens’ testimony, according to a Credit Suisse Group index based on swaps trading. They forecast a 100 percent chance of a 50 basis point reduction, according to the index at 12:46 p.m. in Sydney. By contrast, they had a 34 percent expectation for a 75 basis point adjustment late yesterday.
“There was a degree of bravado in today’s message,” said Su-Lin Ong, an economist at RBC Capital Markets Ltd. in Sydney. “The testimony hinted at a reluctance to cut rates much further.”
Stevens reiterated the central bank’s view that the economy will outperform its global peers because Australia’s financial system is in better shape and monetary policy is working as lenders pass on official rate cuts to households with mortgages.
Cheaper Mortgages
The nation’s four largest lenders, including Commonwealth Bank of Australia, have reduced home-loan interest rates by an average of 378 basis points since early September, compared with the central bank’s 400 basis points of adjustments. Those cuts have saved borrowers with an average A$250,000 ($160,000) home loan more than A$650 a month.
Countries including the U.S. and U.K. face the prospect of zero interest rates because “they’re pushing on their accelerator, but their linkage to the motor is broken,” Stevens said. “We haven’t got that problem and I don’t think we will have, so I’m not sure we’ll need to go that low.”
A report this month showed home-loan approvals jumped in December by the most in almost nine years, helped by demand from first-time buyers after the government tripled a grant for new homes to A$21,000.
Low rates and the government’s A$42 billion in extra spending, approved by the Senate last week, “will work to support demand, increasingly so, as the year goes on,” Stevens said. Still, “we cannot realistically expect anything other than weak conditions in the early part of 2009.”
U.S., Japan Recessions
The central bank predicts the economy will expand 0.5 percent in 2009. By contrast, many of Australia’s major trading partners, including Japan and the U.S., are forecast to stay in recession.
Australia will “come through this very difficult period, certainly not unscathed, but well placed to benefit from a renewed expansion,” Stevens said. The nation’s long-run prospects haven’t “deteriorated by a much as we may all be feeling just now.”
The task of policy makers in coming months will be to distinguish between information that confirms anticipated trends “to which we have already responded, and that which tells us something genuinely new about the prospects for demand and prices over the medium term,” the governor said.
“We have the luxury of having more ammunition to use than most and we still have more if needed.”
To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net
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