The governor of the Reserve Bank of Australia has predicted that global interest rates will remain low for the better part of the next decade.

In a speech entitled ‘The Long Run’ delivered to the Australian Business Economists (ABE) annual dinner in Sydney on Tuesday, RBA governor Glenn Stevens touched on the major forces at play in the global economy.

“My guess is that global interest rates are still going to be very low for a good part of the decade ahead,” Mr Stevens said.

“Clearly there is a likelihood that the Federal Reserve will raise the fed funds rate next month or, if not then, pretty soon. Once it does, intense speculation will begin about a question much more important than the timing of the first increase, namely the timing of the second (and, by extension, the future path of the funds rate).

“But it seems likely that the pace of increase will be very gradual. The ECB and the Bank of Japan are a long way from even thinking about higher interest rates; the ECB is openly contemplating further easing. So the average policy rate in major money centres may be very low for quite a while.”

Mr Stevens said that while it is human nature to focus on the small changes in economic forecasting, it is far more important to gain a firm understanding of the larger forces at work.

“Right now the big forces include, for Australia, the closing chapters of a very large and long-running terms of trade event, with all that means in terms of economic adjustment,” he said.

“This coincides with a household sector no longer being in a position to play a major role in leading growth by significantly increasing its leverage, because it had already done that in the past.”

The business cycle will continue, Mr Stevens said, and there will be economic downturns from time to time. However, he warned that if one of those turns out to be a big one, it will be very new experience for quite a lot of Australians.

“Close to half the workforce has never seen really high, nationwide unemployment,” he says.

“A lot of people in business have, I suspect, not seen how tough conditions can become when virtually every industry and region is contracting.

“That they have not seen this is a good thing – in the sense that it results from the fact that we have not a really serious downturn for a long time now. But if one comes, it will be a shock.”

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