Stevens Says RBA Must Be Cautious About Rate Cuts

By Jacob Greber

June 4 (Bloomberg) -- Australian central bank Governor Glenn Stevens said policy makers must be cautious about cutting interest rates too far because that may encourage some borrowers into debt they can’t afford.

“It is the intention of current monetary policy settings to lower debt-servicing costs, assist efforts to reduce leverage and support demand,” Stevens told a conference in Townsville, Australia, today. “It would be counterproductive, though, if further reductions in interest rates induced a large number of marginal borrowers into debts they could service only at unusually low interest rates.”

Stevens, who said the bank has scope to cut rates if needed, added that “picking cyclical turning points is notoriously hard.” The governor left the benchmark rate unchanged at a 49- year low of 3 percent this week ahead of a report that showed Australia’s economy is one of only a few, including China and India, that grew in the first quarter.

“There’s a warning tone that they are reluctant to cut rates much further,” said Su-Lin Ong, a senior economist at RBC Capital Markets in Sydney.

Australia’s “smaller downturn than most countries” reflects the nation’s limited exposure to “financial excesses that have been the problem in some other countries, as well as the good fortune of our position in relation to China,” Stevens said.

Economy ‘Subdued’

Gross domestic product unexpectedly rose 0.4 percent in the first quarter from the previous three months as consumer spending and exports helped it skirt a recession, a report showed yesterday.

There are signs that the economy has remained “subdued” during the current quarter amid a rapid decline in business spending, Stevens said.

A report last month showed business investment tumbled last quarter at the fastest pace on record.

“The rapid decline in business investment is almost certainly continuing,” Stevens said.

And while consumer spending has “held up quite well so far,” it may weaken in coming months as rising unemployment “starts to weigh on incomes and willingness to spend,” he added.

‘Well Placed’

“On the other hand, we are likely to see significant growth in public spending over the year ahead, reflecting fiscal policy decisions.

“Overall, then, our expectation remains that the economy will be well placed for expansion towards the end of this year.”

To spur an economy that unexpectedly contracted in the fourth quarter for the first time in eight years, Stevens cut borrowing costs by a record 4.25 percentage points between September and April.

Stevens today reiterated that weaker growth and slower inflation give policy makers “some scope” to reduce borrowing costs further if it helps secure “a durable upswing.”

“The emphasis on ‘durable’ is important,” he said.

Australia’s dollar was little changed after Stevens speech, after dropping yesterday by the most in six weeks. The currency traded at 80.11 U.S. cents as of 1:03 p.m. in Sydney from 80.08 cents in New York yesterday, when it touched 79.33 cents in the biggest slide since April 20.

Investors expect Australia’s overnight cash rate target will be higher in 12 months, according to a Credit Suisse Group AG index based on swaps trading.

Traders forecast the benchmark will be 16 basis points higher in 12 months, the index showed at 1:01 p.m. in Sydney. At the start of May, they tipped a 37 basis points of cuts.

To contact the reporter for this story: Jacob Greber in Townsville at jgreber@bloomberg.net