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Reserve Bank governor puts the reaction to his latest move down to a ‘phenomenal situation’.
After yesterday's rate cut Reserve Bank Governor Graeme Wheeler talked to Liam Dann about the issues behind the decision.
Rate cuts are supposed to bring the currency down, this didn't. What's happened?
Since the June statement we've seen the Bank of Japan ease, Bank of England ease, we've seen the Reserve Bank of Australia ease. If you combine that with quantitative easing that is larger than at any other time - and it was pretty large in 2009 - and with negative interest rates in countries that account for a quarter of world output, you're just in a phenomenal situation.
Isn't it worrying that as rates head towards zero the power of central banks to move markets is waning?
Absolutely. There's no question about that. I think that there are a lot of issues around negative interest rates. It signals that, by and large, central banks have pretty well run out of options. We've cut six times since June . We've reduced the OCR by 150 basis points and the TWI [trade weighted index of currencies] is 1.5 to 2 per cent higher than when we started cutting last year.
So is it worth cutting at all?
There will be some who say: Look, you've got the economy running strong - maybe getting towards 3.5 per cent growth - why are you cutting interest rates? You can make a sound argument. But if you don't reduce rates you run the risk that the exchange rate will appreciate even more, given that your interest rate differential will get even wider. Secondly, you've got negative tradeables inflation, which we've had for four years. And the longer it continues the more drag it has on actual inflation outcomes. The risk is that inflation expectations start falling. Once you find inflation expectations unhinged and unstable - and we're not in that situation, far from it hopefully - but once it happens it's very difficult to get those expectations up again.
Watch: Economy Hub - Rate cut analysis: What went wrong?
Do you just have to accept the limits of your control over the currency?
Yeah that's some of the frustration, we would like to see it lower. That would help us in terms of dairy, manufacturing ... it would also help us in terms of our inflation objectives and reduce the risk of a potential fall in inflation expectations.