Economists believe the Australian central bank would be reluctant to lower interest rates any further, but financial markets are still factoring in the risk of a further cut to 1.75 per cent by early next year.
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Turmoil on financial markets could dent global economic growth but Australia has a good chance of emerging unscathed, the head of the Reserve Bank says. “Everyone knows that, eventually, this will have to be reflected in less accommodative US monetary policy”, he added.
He said businesses will invest more at some point, but employment growth has still proved steady in the past year.
“The more important factor though, I think, is not so much the timing of the first one, as the pace of the subsequent increases”.
Mr Stevens said “they need to [go up] for the US’s sake”.
“There will be a lot of people in financial markets right around the world whose career experience to date does not encompass having seen the Fed raise the funds rate, so you have to think there’ll be a few upsets here and there”, Mr Stevens stated.
“Many developing countries find that their credit conditions tend to tighten a bit when the Fed starts to lift”, he added.
The United States central bank will have concluded its crucial two-day meeting just hours before Mr Stevens fronts the House of Representatives economics committee for the three-hour hearing on Friday morning.
Granted his wish of a lower Aussie dollar, Mr Stevens now wants a similar move in the unemployment rate, which he said is too high at 6.2 per cent. Some cushioning has come from a lower Australian dollar.
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“We are hearing about the effects of this in our liaison and also seeing it in the data on such things as tourism flows as well as exports of business services”, Mr. Stevens said.
