Bullock described markets as “pretty sanguine” about current risks, particularly uncertainties stemming from the US, telling the media at the post-meeting press conference that the Reserve Bank (RBA) does not target asset prices.
When questioned about potential unconventional monetary responses in the event of a market crash, Bullock referenced the RBA’s past crisis measures but stressed any action would depend on inflation and employment outcomes, not market turbulence alone.
“If you think back for example to the GFC, that was a financial crisis and what happens in a financial crisis, it impacts the flow of credit to the private sector, and that therefore has a depressing effect on the economy. In those circumstances, you would typically be alert to financial stability issues and you might be willing to respond with interest rates if it was needed,” she said, but added that the “guiding light” has to be inflation and employment.
On the current market conditions, Bullock declined to label asset prices as overvalued but cautioned that given the prevailing market sanguinity, “there is a risk that there may be some volatility in financial markets particularly with what’s going on in the United States”.
“But at the moment, everyone seems pretty relaxed that the worst will be avoided,” she said.
The governor was clear that the RBA does not target asset prices, nor will it intervene simply to prop up share markets, but clarified that if there are financial stability implications, the RBA “will be there” in line with its responsibilities.
“But it’s not going to come in just for the sake of protecting asset prices. We don’t aim at asset prices,” Bullock said.
Echoing this measured stance, AMP chief economist Shane Oliver noted stretched equity valuations but cautioned against the RBA focusing on asset prices unless they threaten inflation or employment targets.
“They should only be concerned about it if it threats their mandate for full employment and 2–3 per cent inflation,” Oliver said. “Trying to focus on reducing market volatility could threaten the achievement of their mandate, e.g. maybe leading to higher inflation.”
Oliver added that should a sharp sharemarket decline signal genuine economic weakness, a historical recession warning, the RBA would be justified in easing monetary policy, but minor market fluctuations should be ignored.
Touching on market complacency, the chief economist agreed with Bullock, noting that “valuations are stretched on most measures, suggesting a degree of complacency”.
He attributed this to expectations of lower interest rates, the absence of recession signals, strong US profit growth and optimism that Australian earnings will rebound after three years of declines.
