From the AFR, Glenn Stevens in the Q&A for today’s speech:
[Stevens] repeated that comment in response to questions after the speech, but added that he did not expect interest rates to go close to zero, as they have in Europe and the US. This has raised the problem of the so-called “lower bound” where conventional monetary policy becomes ineffective.
Mr Stevens said: “I think from the point of view of lower bounds I don’t think those will impair us in the likely scenarios we face. The fact that people in some cases have a desire to get leverage down [has allowed for lower rates], but it wont be a permanent feature so I am not especially concerned about running out of ammunition.”
He also played down concerns that the decline in the exchange rate would push up the price of imported goods and trigger a sharp rise in inflation.
Mr Stevens hinted that as rates fell or stayed low, savers should start to shift their portfolios towards taking on “some more risk” by buying shares and houses, “though obviously we don’t want too much risk taking”.
The governor indicated that the bank is playing close attention for evidence that the current record-low official cash rate is fuelling the threat of asset bubbles.
“One of the things we have been watching for as we have been reducing interest rates has been an indication of savers shifting portfolios towards some of the slightly more risky asset classes, as that is one of the expected and intended effects of monetary policy easing,” he said.
I agree that there won’t be an Australian ZIRP but not because interest rates will work. Rather, the need to fund the current account deficit with a positive carry from funding nations will pull up rate cuts long before we get to zero.
Put another way, cut rates to 1% and the dollar will collapse.
