Stevens drops his cards - rate cut coming

Interesting speech from Glenn Stevens today which you can read here:

I've copied a key excerpt below.

In summary, the soft inflation data leaves room for another interest rate cut and the RBA is not so concerned about dwelling price growth at this stage to preclude them from cutting again.

The markets have made up their mind: the Aussie dollar has fallen by 2 cents in the last couple of days to 90.7 cents, and future markets believe that another cut is all but a done deal (pricing in a massive 91% chance of a rate cut next week).

"We have been saying recently that the inflation outlook may afford some scope to ease policy further if needed to support demand. The recent inflation data do not appear to have shifted that assessment.

One's assessment of prospects for consumption will be driven mainly by one's assessment of the outlook for income, but will also be affected by expectations about asset values and in particular one's view on whether housing prices are overvalued. 

Those who think they are will be drawn to the conclusion that a number of additional years of flat or declining real per capita asset values lie ahead, for non-financial assets at least; those who are not so worried about housing prices may expect that stronger growth, in real per capita terms, might occur.

Either way, however, it would seem unlikely that we could bank on a resumption of sustained growth in assets, in real per person terms, of 7 per cent per year over the next few years. It follows that the saving rate is unlikely, any time soon, to decline back to where it was in 2005.

Implications that might flow from these observations would include the following.

First, some strengthening in consumption from recent rather subdued growth rates is a reasonable expectation, but we should not expect a return to the sorts of growth seen in the 1995–2007 period. 

Nor, surely, should we try to engineer one, at least on the back of borrowing. Households continue to service their borrowings well – the household arrears rate is low and has fallen slightly over the past year – but we would be risking future problems were we to see a big run-up in debt from here. 

This does not preclude prudent levels of borrowing by new entrants to the housing market, or by investors, nor does it preclude gains to consumers as costs are squeezed out of the system."