Central Bank boss Glenn Stevens hopes the unemployment rate won’t rise too much further but says a period of interest rate stability should be supportive for business.
The Reserve Bank governor told federal politicians of the House Economics Committee that this week’s national accounts for the December quarter showing annual growth at 2.8 per cent was roughly in line with the central bank’s forecast.
“For some time, our view has been that growth has been running below its trend pace,” he said in his opening statement on Friday.
“The national accounts released a couple of days ago don’t significantly change that assessment.”
In line with the RBA’s decision this week to leave the cash rate at 2.5 per cent at its monthly board meeting, Mr Stevens said a period of interest rate stability was reasonable given the circumstances facing the economy.
“As well as the low level of interest rates generally, a sense of stability should be of some help for businesses and households as they form their plans,” Mr Stevens said in the first of his twice yearly public hearings.
National Australia Bank senior economist David de Garis said that with the RBA’s latest rate decision only three days old, any about turn by Mr Stevens “would have been a complete surprise”.
Mr Stevens said unemployment, which currently stands at a 10-year high of six per cent, has yet to peak.
“Unemployment will rise further; I would hope not too much further,” he said.
He said that while new data had shown economic growth strengthening, it probably took one or two quarters for the labour market to catch up.
However, he said, the outlook contained many uncertainties, not least the `hand over’ from resources investment spending to sources of demand outside mining.
He said the drivers of growth were shifting and the decline in investment spending by mining companies would accelerate over the coming year.
“Business investment spending outside mining, which has been very low indeed, is bound to pick up at some stage,” he said.
He said dwelling investment activity would, clearly, rise strongly over the period ahead.
Mr Stevens said that while inflation was not quite as low as it might have looked six to 12 months ago, he did not believe it was accelerating to the extent a literal reading of the latest data might suggest.
The consumer price index jumped to 2.7 per cent over 2013, while underlying inflation rose to 2.6 per cent, albeit remaining within the central bank’s two to three per cent inflation target.
He said there could have been an “element of noise” in the December quarter data.
“The general situation – 18 months of below-trend growth, a rise in unemployment, a marked slowdown in wages – is not one that would be, obviously, associated with a sustained rise in price pressures,” Mr Stevens said.
He said Australia’s terms of trade had been little changed over the past year, though the bank still assumed they would decline further in the future.
