Australia’s central bank highlights limits to monetary easing

SYDNEY, Aug 10 (Reuters) – The head of Australia’s central bank said on Wednesday that there were limits to what monetary stimulus could achieve, including "dialling up" economic growth or pushing inflation higher in short order.

In his last speech as chief, Reserve Bank of Australia (RBA) Governor Glenn Stevens returned to a favourite theme of the over-reliance on monetary policy around the world and the need for governments to step up with more investment spending.

In particular, Stevens downplayed concerns that the RBA might take excessive policy steps in order to try and increase inflation back to target "in short order".

"I can assure you that the Board has been very conscious of that possibility and, accordingly, has proceeded very carefully," said Stevens who after a decade as chief hands over the helm to his deputy Philip Lowe in September.

Underlying inflation slowed to an all-time low of 1.5 percent in the year to June, well below the RBA’s long-run target of 2 to 3 percent. As a result, the central bank last week cut interest rates a quarter point to 1.5 percent.

"We need realism about how much we can expect monetary policy to do, including pushing inflation up quickly.

"If it were the case that undershooting the target for a period while achieving reasonable growth was the ‘least bad’ option available, the inflation targeting framework has the requisite degree of flexibility to allow such a course."

Stevens also refuted suggestions that the RBA would have to abandon its 2 to 3 percent target altogether, or at least lower it to take account of global disinflation.

Stevens said the power of lower interest rates alone to generate demand was always going to be limited when households already had so much debt. Australian households hold debt equal to around 125 percent of the country’s A$1.6 trillion in gross domestic product.

Instead, he noted government debt amounted to about 40 percent of GDP, suggesting it had the capacity to take on more debt than the household sector.

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While he was not advocating the government borrow to fund everyday spending, there was a case to borrow for long-lived investment assets that yield an economic return.

The federal government of Malcolm Turnbull has shown little inclination to borrow for infrastructure investment, being politically committed to reining in the budget deficit and "living within its means".

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