"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 (borrowing) safely?".
-Glenn Stevens, RBA Governor
Before retiring in September, the Reserve Bank governor, Glenn Stevens has admitted the RBA faces a difficult job due to necessity to balance between various risks as well as that it could undershoot its inflation target if that is the "least bad option". Also, Mr Stevens defended his and the bank's record for the past decade of keeping inflation within the 2-3% target range on average, as well as maintaining strong economic development and unemployment rate between 5-6%. Mr Stevens outlined that the RBA's 2-3% inflation target was no longer valid, by giving deflationary pressures locally and in the global economy. Meanwhile, the RBA last week forecasted inflation will remain below the target till the end of its forecast horizon in December 2018. Moreover, some economists insists the target needs to be lowered, as there are growing risks associated with lowering interest rates too far to seek a high inflation outcome. For example, a surge in already high house prices. On top of this, Mr Stevens noted that slowing growth in the working-aged population and reduced productivity growth affects negatively on economic expansion. "All of this points to the need not only to calibrate our assumptions about future growth prudently, but also to maximise our efforts in those areas that can lift potential growth - productivity," he said. That does not mean the absence of further interest rate cuts, but it does mean that the Reserve Bank will be keeping a close eye on runaway housing prices that create financial stability risks.
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