Low interest rates are doing their part to help the economy, Reserve Bank governor Glenn Stevens has declared while warning the jobs market is still weak.
Giving his opening statement to the House of Representatives’ Economics committee, Mr Stevens signalled interest rates would remain low for some time to come.
The bank this week kept official rates at 2.5 per cent although GDP, retail and trade figures after the RBA’s monthly meeting all suggested an uptick in the general economy.
Mr Stevens said there were positive signs, particularly in the housing construction sector while savers were now moving out of safe havens and looking for better returns.
A fall in the value of the Australian dollar, while adding to inflation, had also aided the economy in recent months.
“On the whole, then, accommodative monetary policy is playing its part in supporting sustainable growth in demand, consistent with the inflation target,” he said.
But Mr Stevens said there were still headwinds.
Consumers were still “skittish” with little chance of the pre-GFC surge of spending on the horizon.
Investment plans by firms outside of mining were still low while the Federal and State governments were all planning to reduce their spending.
This all meant the jobs market was still soggy.
“The labour market will probably remain soft for a while yet, given that it lags changes in activity. This has seen the pace of growth of wages decline noticeably,” he said.
While there were promising signs, the period ahead still had plenty of uncertainties.
The biggest remained whether the non-mining sector could replace the looming fall in resource company spending.
“The question then is: will the additional demand likely to be generated outside mining as a result of these trends be just the right amount to offset the large decline in mining investment spending, so keeping the economy near full employment?” he said.
“No one can answer that question with great confidence.”
Mr Stevens said given these continuing uncertainties a period of interest rate stability was the best way forward.
“We have signalled the likelihood, if the economy evolves more or less as expected, of a period of stability in the cash rate,” he said.
“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.”