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UPDATE 2-Australia's cenbank gov: Better ways to stimulate demand than rate cuts
February 23, 2017 / 11:31 PM / in 6 months

UPDATE 2-Australia's cenbank gov: Better ways to stimulate demand than rate cuts

* RBA gov reiterates steady path for interest rates

* Says fiscal spending needed to stimulate economic growth

* Notes danger of debt-fuelled bubble and bust (Rewrites throughout, adds economist comment)

By Swati Pandey and Wayne Cole

SYDNEY, Feb 24 (Reuters) - The head of Australia's central bank said on Friday that the economy would benefit little from cutting interest rates already at record lows, putting the onus on the government to make fiscal reforms and find ways to stimulate demand.

Reserve Bank of Australia (RBA) governor Philip Lowe told lawmakers that growth should come from more investment in public infrastructure, while noting a lack of business investment despite the policy cash rate of 1.50 percent.

"With interest rates so low...it would be a better strategy to create new assets and the best new assets in our country are infrastucture, particularly in transportation networks," Lowe told a parliamentary economics committee in Sydney.

"I have long thought there must be quite a few investment projects in urban transport, where the return would be greater than the government (10-year) borrowing rate of 2.8 percent," he added.

The central bank chief said that monetary policy was not the best way to stimulate demand in the economy.

"It's really in the hands of the parliament to create an environment where firms want to invest and people want to spend," he added.

The ruling coalition has failed to press ahead with its legislative agenda since Prime Minister Malcolm Turnbull won a razor-thin majority last July.

Policies such as corporate tax cuts have been blocked in a divided Senate, leaving Turnbull's popularity at its lowest in over a year.

"Looks like we are talking about a status quo (on fiscal policy) for a couple of years," said Michael Workman, senior economist at Commonwealth Bank of Australia in Sydney.

"It's very very difficult for the government to implement any kind of programme to restore a stronger budgetary position, to stimulate the economy again in the way that is required...and that's because of the intransigence in the Senate."

BALANCED GROWTH

Since taking over the reins at the RBA in September, Lowe has repeatedly emphasised the limits to monetary policy and earlier this week said further cuts in interest rates would not be in the national interest.

Data out this week showed investment had fallen in every quarter of last year.

Domestic consumption has also been subdued with retail sales growing at a tepid pace. There is a high degree of slack in the labour market, adding pressure on wages growth which is stuck at record lows.

High levels of household debt combined with subdued incomes were making households wary of spending freely, said Lowe.

The ratio of household debt to disposable income is at an all-time peak around 180 percent, while the saving rate has fallen. Mortgage debt stands at A$1.7 trillion, larger than the country's annual economic output.

"There is a balance to be struck. Too much borrowing today can create problems for tomorrow, because debt does have to be repaid," Lowe said.

"The balance that is required is to support spending in the economy today while avoiding creating frugalities in household balance sheets that could cause problems for the economy later on," he said.

The futures market has almost priced out any chance of a rate cut this year, with some investors even toying with the idea of a rate hike by early 2018.

Still, Lowe said he was paying "close attention" to trends in the labour market as a high and rising unemployment rate could become a catalyst for a rate cut.

The unemployment rate has been steady for a little over a year at around 5.7 percent, although Lowe said a "sustainably lower unemployment rate should be possible in Australia."

The head of the central bank appears before the committee twice a year to answer questions on the economy and monetary policy. (Reporting by Swati Pandey and Wayne Cole, Editing by Simon Cameron-Moore)

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