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Speaking at the Anika Foundation Luncheon in Sydney yesterday, Mr Stevens took the opportunity to colour his final address as governor with some hard-hitting words on the future.
“Many difficult choices will need to be made along the path of budgetary adjustment,” he said.
“At present, general public debate starts with commitment to the need for reform and for putting public finances on a sustainable medium-term track. But when specific ideas are proposed that will actually make a difference over the medium to long term, the conversation quickly shifts to rather narrow notions of ‘fairness’, people look to their own positions, the interest groups all come out and the specific proposals often run into the sand.
“If we think this rather other-worldly discussion will not have to give way to a more hard-nosed conversation, we are kidding ourselves. That will occur should there be a moment of crisis, but it would be better if it occurred before then.”
Mr Stevens highlighted that, through a combination of “extraordinary circumstances”, the central banking community globally has found itself doing “unprecedented things”.
“We in Australia have done fewer such things, but we are connected to the world, and the effects of policies adopted elsewhere condition the policy choices available to us.”
Although we have not implemented ‘unconventional policies’, Mr Stevens said Australia has interest rates at levels lower than any of us have seen before in our lifetimes. Moreover, he remarked that the ‘return to normal’ at the global level “looks like being a very, very slow process. And normal is a different place now.”
The RBA boss admitted, not for the first time, that he has serious reservations about the extent of reliance on monetary policy around the world.
“It isn't that the central banks were wrong to do what they could, it is that what they could do was not enough, and never could be enough, fully to restore demand after a period of recession associated with a very substantial debt build-up,” he said.
“Certainly easy monetary policy can reduce the burden on debtors through the cash flow channel, at the expense of savers. This is probably still expansionary in net terms, though possibly less so than it used to be.”
In the end, the most powerful domestic expansionary impetus that comes from low interest rates surely comes when someone, somewhere, has both the balance sheet capacity and the willingness to take on more debt and spend, Mr Stevens said.
The problem now, he continued, is that there is a limit to how much we can expect to achieve by relying on already indebted entities taking on more debt.
“So for policymakers looking to use low interest rates to boost growth, the question is: which entities, if any, in the economy can accept higher leverage safely?”
Interestingly, Mr Stevens noted that the popular debate in Australia about government debt and how we limit or reduce it seems so often to be conducted while largely ignoring the size of private debt.
“To outside observers this seems odd. Foreign visitors to the Reserve Bank over the years have tended to raise questions about household debt much more frequently than they have raised questions about government debt.”
According to the Reserve Bank governor, the way ahead must involve “a rather more nuanced consideration” of these issues.
[Related: RBA names new governor]