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Reserve Bank of Australia - Source: ONE News -
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Reserve Bank of Australia (RBA) governor Glenn Stevens says it would be a mistake to be "too timid" to raise interest rates in response to a brighter economy.
Speaking at a breakfast function in Perth on Thursday, Stevens said the period of greatest weakness in Australia was "probably past" and the risks of really serious economic weakness had "abated".
In that environment, the central bank governor said monetary policy needed to be "recalibrated" to reflect the changing circumstances.
"If we were prepared to cut rates rapidly, to a very low level, in response to a threat but then were too timid to lessen that stimulus in a timely way when the threat had passed, we would have a bias in our monetary policy framework," Stevens said in prepared remarks.
"Experience here and elsewhere counsels against that approach."
The RBA board took the first step to returning interest rates towards what Stevens described as more normal levels last week, when it lifted the cash rate to 3.25%, from 3.0%.
Stevens said the 425 basis points worth of cuts delivered between September last year and April was a quick, aggressive response to limit the downside risks to economic activity.
The RBA's actions, along with government stimulus measures and the recovery in China had helped head off the worst effects of the global recession, Stevens said.
"The very low interest rate settings were designed for a weaker economy than we are in fact facing," Stevens said.
"Plainly, the downside risks to which the board was responding earlier have not materialised.
"This is not a problem. In fact, it is a very desirable situation."
