The main events last week were the signing of the China - Australia Free Trade Agreement and the release of the Reserve Bank’s November Board minutes, as well as a speech by RBA Governor Glenn Stevens.
The key message in this speech by Glenn Stevens was that Australia needs low interest rates for some time yet. Governor Stevens said, “The level of interest rates, although very low, is well warranted on macroeconomic grounds” and “monetary policy should be accommodative and, on present indications, is likely to be that way for some time yet”.
He added that the currency is still too high by fundamental standards, and there is no threat from inflation given excess capacity in the labour market. It is unclear if house price increases will continue or abate and it’s unclear whether growth in lending to housing investors will continue at the current strong pace. However, the RBA Governor gave little impression that raising rates is the preferred response to deal with that problem. He did stress that lengthening the cycle and avoiding boom/bust scenarios is vital if we want to ensure we don’t have a housing downturn while mining investment is still falling (hard).
Australia finally secured a free trade agreement with China, its largest trading partner, earlier in the week. The agreement will deliver substantive benefits to the Australian economy over time.