Bank chief issues warning on Oz growth

Governor of the Reserve Bank of Australia Glenn Stevens.

Reserve Bank of Australia governor Glenn Stevens says the economy's growth will remain lower for longer and policy easing may be less effective than in the past.

"The economy needs a bit more growth than we currently have," Stevens told a parliamentary panel in Sydney on Friday.

"The board is also very conscious of the possibility that monetary policy's power to summon up additional growth in demand could, at these levels of interest rates, be less than it was in the past."

The central bank ended a 17-month pause and cut interest rates this month to a fresh record-low of 2.25 per cent as it tried to boost confidence and encourage hiring in an economy where unemployment has risen to a 12-year high.

The economy is on track to record an expansion below its potential for six of the past seven years, the longest stretch since the last recession in 1991.

Traders are pricing in about a 70 per cent chance the RBA will cut rates by another quarter-point to 2 per cent at its March meeting, according to swaps data compiled by Bloomberg.

"The door is certainly open to further rate cuts if the board thinks the economy needs an extra nudge along," said Michael Blythe, chief economist in Sydney at Commonwealth Bank of Australia, who predicts another reduction in March.

Australia's economy is struggling with the effects of a fall in prices for its key commodity exports including an almost halving of iron ore last year. The metal generates A$1 in every A$5 of export income. A 50 per cent slump in oil prices last year could also drive down prices of Australia's energy exports.

In China, Australia's biggest trading partner, consumer prices rose at the slowest pace in more than five years in January and factory-gate deflation deepened with slumping commodity prices. The weakening demand in China and rising rate-cut bets have driven a 17 per cent fall in the Australian dollar against the United States currency since the start of September.

Stevens' task hasn't been helped by the Government in Canberra, where Prime Minister Tony Abbott has faced the kind of internal fighting over his leadership that saw the opposition Labor Party evicted from office in September 2013.

The governor said Australia's trend of rising public debt needed to change over the medium-term. Stevens said that while he wasn't forecasting a downturn, in the event of one the budget deficit could quickly rise from about 2 per cent of gross domestic product to 5 per cent.

The RBA's decision to provide further rate stimulus risks inflating a house-price bubble. A Corelogic-RP Data home value index showed Sydney home prices rose 13 per cent in January from a year earlier. Home loans to investors also climbed to a record 50.6 per cent of all new mortgages in December.

- Bloomberg