Australia central bank keeps its cool in the face of global turmoil

People walk past the Reserve Bank of Australia building in central Sydney in this file photo.
People walk past the Reserve Bank of Australia building in central Sydney in this file photo. PHOTO: REUTERS

SYDNEY (REUTERS) - Australia's central bank governor said Australia's economy should continue to grow moderately as falling mining investment is offset by growth elsewhere, although the current turmoil in global markets could scuttle this view.

"One key question will be whether the recent financial turbulence itself will have a material negative effect on aggregate demand - in Australia or abroad. I don't expect that we will be able to answer that question for a little while yet," Reserve Bank of Australia (RBA) Governor Glenn Stevens told legislators in twice-yearly testimony on Friday (Feb 12).

But with inflation unlikely to be a problem over the next year or so, there was scope to cut interest rates further if necessary, Mr Stevens said in remarks to the House of Representatives Standing Committee on Economics.

The RBA left its cash rate unchanged at a record low 2.0 per cent last week, when it met for the first time in 2016. It has been on hold since the last cut in May.

As expected, Mr Stevens declined to give any guidance on the future level of the RBA's cash rate.

Gareth Aird, senior economist at Commonwealth Bank, said Mr Steven remarks were in keeping with the RBA's recent tone. "But he emphasised that there is a lot of uncertainty regarding the outlook and we are yet to see if recent financial market volatility will spill over to negatively impact demand. As a result, the RBA has a conditional easing bias."

Indeed, Mr Stevens spent a considerable time fielding questions from lawmakers about slowing growth in China, Australia's biggest trading partner.

"The more recent anxiety is probably best described as greater uncertainty over the intentions of Chinese policymakers and over whether they will be able to carry off the economic transition China needs. This anxiety has been reflected in capital flows," he said.

For now though, record low rates at home and a weaker Australian dollar have helped to sustain growth, though Stevens seemed to suggest the currency could fall even further.

"The Australian dollar is around the same level now as when we last met with the Committee, though commodity prices are lower," he said.

Last month the Aussie fell below 69 US cents to lows not seen since 2009. While it has stabilised around 71 cents, the decline from peaks above US$1.10 has helped fuel Australia's export competitiveness.

On the property market, Stevens noted that recent efforts by the banking regulator to tighten lending standards on housing investment have been effective.

Government data on Friday showed the value of investment property loans came in at around A$11.6 billion in December, well down from the peaks of above A$14.0 billion seen earlier last year.

"In summary then, the economy is continuing to grow at a modest pace, in the face of considerable adjustment challenges. It has apparently been generating more employment growth and lower unemployment than we expected, while inflation has remained quite low," he said.