Borrowers using low rates for repayments rather than going to Bunnings: RBA's Glenn Stevens
The outgoing RBA Governor thinks more borrowers are actually using the low rates to accelerate their repayments rather than going to Bunnings.
He was asked about household debt and how would QE work in Australia by the Australian Financial Review given the recent overseas experience.
"Well, I'm very much hoping we never need to find out.
"We've certainly observed what has been done elsewhere, and there's any number of assessments around on its effectiveness.
"I'm very thankful not to have been in the position that they were in of feeling that we've got to do more.
"We haven't been in that position, and hopefully we won't be."
He said his test is: "Who went to Bunnings in the end as a result of that?
"Did someone go and take borrowed money and spend it on real goods and services that wasn't going to otherwise?
"Because that's actually in some sense the ultimate test. Did we create some additional demand?"
"It's impossible to know really, but I suppose I'm left with some doubt that all that many people went to Bunnings that weren't otherwise going to."
He was asked to judge the transmission mechanism works in Australia, when you're cutting cash to such low levels?
"I think on the work that I'm aware of, the evidence that I'm aware of, I would say that cash-flow channels still probably work.
"I'm personally of the view that maybe not as strongly as they used to, because I think the evidence is that the borrower households – that's where the action comes from, and the way this is supposed to work is the borrowers have more debt than the savers have deposits.
"That's a fact.
"And when you change rates the borrowers are the ones who are, you know, spending all their income, and if I give them a bit more income.
"They're likely to spend that.
"And the savers – the cut to their direct income is actually not as big, and they're less likely to respond.
"That's still true.
"But I think more of the borrowers are actually using the low rates to accelerate the repayment rather than going to Bunnings.
"Now, what that does is it's accelerating the decline of the debt for those individuals, those households, so the day when they are freer of the debt or have a lower debt and they're then more confident to spend – that day is getting closer.
"But it probably hasn't been as much of an immediate effect maybe as it might once have been.
"And I'm hypothesising here. You can't prove this," he said.
He noted credit growth slowed down in the past year.
"So I think a lot more people are intent on trying to get to the point where they're carrying a lower debt load.
"It's the new people borrowing to come into the market that, you know, keep credit growing at all.
"So I think what's driving that is just people have changed their opinion about how much confidence they have in future asset values rising and how much leverage they're prepared to hold.
"I think a lot of people thought: "I'm going to be more careful."
Glenn Stevens has conceded that he has "some discomfort' about rising Sydney house prices, but argued that these concerns need to be weighed up against the need to stimulate economic activity across the nation.
