RBA says 'normal' cash rate is well north of 3%

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This was published 14 years ago

RBA says 'normal' cash rate is well north of 3%

Reserve Bank of Australia governor Glenn Stevens says a "normal" cash rate is well north of where it is now.

"It's a good deal north of what the cash rate is now," he told the House of Representatives economics committee meeting in Sydney today.

He went on to use the word "noticeably" when referring in the same response to how high it could go.

Mr Stevens said he did not want to get into an argument about the definition of normal rates.

I don't want to endorse a particular number because that, I think, would trigger all sorts of excitement out there," he said.

"We shouldn't have a dogmatic opinion about exactly where this so-called normal is, because for a start it's not necessarily a constant."

In its statement on monetary policy released last week, the central bank referred to the cash rate - currently at three per cent - returning to a more normal level when the economy recovers.

It said: "...with the cash rate at an unusually low level and the global economy stabilising, movement to a more normal setting of monetary policy could be expected at some point if further signs of a durable recovery emerge."

Financial markets have generally interpreted a "normal" cash rate as between five and six per cent.

The central bank left the cash rate at a 49-year low of three per cent for the fourth consecutive month in August.

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Between September 2008 and April, the RBA lowered the cash rate from 7.25 per cent to three per cent in a bid to cushion the local economy from the global financial crisis.

"It is pretty clear `normal' is more north than where the cash rate is now," Mr Stevens said.

"For the past 17-18 years, in the low inflation world since the early 1990s, the average cash rate is in the fives.

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"Now, I don't won't to endorse a particualy number for all sorts of excitement out there for exactly about when the slope is going to that figure and when."

AAP

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