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Rates won't keep sliding down: RBA governor -

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Rates won't keep sliding down: RBA governor

The World Today - Monday, 8 September , 2008 12:25:00

Reporter: Richard Lindell

ELEANOR HALL: The Reserve Bank governor Glenn Stevens is hosing down expectations that interest
rates are at the start of a big slide down.

Addressing the House of Representatives Standing Committee on Economics in Melbourne this morning,
the governor noted that the economy is slowing, but he said he thinks the chances of recession are
slim. That would reduce the need for the Reserve Bank to ease rates quickly, particularly while
inflation remains a problem.

Richard Lindell has been listening to the governor's comments and he filed this report:

RICHARD LINDELL: Anyone expecting a rapid succession of interest rate cuts in coming months would
be disappointed by the tone of governor Glenn Stevens' speech.

GLENN STEVENS: I think in the near term the question will be - do you we hold here or do we go down
a bit more? I don't think, unless something quite surprising happens, it seems to me unlikely that
we'll be reversing course up again in the near term.

RICHARD LINDELL: The Reserve Bank's key role is to control inflation which is still rising and is
forecast to peak at five per cent at the end of the year.

But governor Glenn Stevens argues that on balance the Reserve Bank can show patience and restraint
in its bid to tame inflation.

GLENN STEVENS: Rather than trying to achieve that larger fall by pushing inflation down more
quickly, the broad strategy is to seek a gradual fall but over a longer period. This carries less
risk of a sharp slump in economic activity though it does require a longer period of restraint on

On the other hand it carries the risk that a long period of high inflation could lead to
expectations of inflation rising to the point where it becomes more difficult and more costly to
reduce it.

RICHARD LINDELL: And it's that balance between controlling inflation and maintaining growth that
the Reserve Bank is now looking for. It's the reason why the RBA moved to reduce rates last month,
with the central bank now forecasting even slower growth in the months ahead.

GLENN STEVENS: I don't think we're in recession now. I don't think there's the evidence to suggest
that. We are in a period of slow growth, rather like two or three episodes of that nature that I
can recall over the years. You know I think it would be dishonest to deny that there's any
possibility at all that you could have a recession, there's clearly some probability of that.

But I think the most likely outcome still continues to be the one that's in the outlook that we've
put out over the last six months.

RICHARD LINDELL: But unlike the episodes of slower growth in 1991 and 2001, where interest rates
were slashed quickly, this time there's too much momentum in the economy to warrant similar cuts.

Craig James is the chief economist at CommSec.

CRAIG JAMES: There is still the potential for the Reserve Bank to cut interest rates modestly, but
not decisively. And what the governor has highlighted is that inflation is still high, the business
sector and the government sector are still stimulating the economy. And it's likely that we're
going to see consumer spending recover in coming months as a response to the tax cuts, rate cuts
and also lower petrol prices.

The challenge though to get inflation under control is going to take quite some time. It's going to
be a degree of time before we get inflation back from the target band. So certainly the Reserve
Bank governor is not suggesting that we can cut interest rates decisively over the next couple of

ELEANOR HALL: That's Craig James at CommSec ending that report from Richard Lindell.