Australia won’t be joining the zero interest rate club of the world’s two largest economies, but the Reserve Bank of Australia’s chief has left the door open for further cuts.

Whether another cut occurs when the RBA board meets next month is up for debate after governor Glenn Stevens told a parliamentary committee that a huge stimulus had already been injected into the economy.

Mr Stevens, facing his six-monthly grilling in front of the House of Representatives economic committee, said the effects of the RBA’s aggressive rate cuts to date were only just beginning to be felt.

But they would have quite a “powerful impact” on the economy, he told the committee in Canberra on Friday.

Financial markets pared back their expectations of another large rate cut next month during the hearing.

The governor backed the federal government’s massive fiscal stimulus measures, and also cleared up the controversy over last year’s unlimited bank deposit guarantee scheme, saying it avoided a run on the banks.

“The lesson from Northern Rock in the UK, they had three goes in initiating their guarantee … so the lesson I took from that was you should probably err on the generous side at first, and if necessary come back later.”

But he does expect difficult times ahead, saying it was unrealistic to expect anything other than weak conditions in the near-term.

A big drop in interest rates, the fiscal stimulus and a lower exchange rate would support demand, “increasingly so as the year goes on”.

“Australia will come through this episode not unscathed, but will be placed to benefit from this,” Mr Stevens said.

The federal government introduced a $10.4 billion fiscal stimulus package in October that included cash handouts to low-income families and pensioners.

Last week, it won parliamentary approval for a new $42 billion fiscal stimulus package, which includes more than $12 billion in cash handouts to taxpayers.
“2009 and, to some extent, 2010 would have seen a lower pace of aggregate demand in Australia, absent those measures,” Mr Stevens said.

Even if households saved their handouts, the economy would benefit later.

“That helps them be in a position to expand spending, even if that’s some way down the track,” he said.

The central bank has chopped 400 basis points off the official cash rate since September, but even at a 45-year low of 3.25 per cent, it remains one of the highest in the world.

“If there is a need to use more interest rate stimulus then we can,” Mr Stevens said.

But Mr Stevens was reluctant to give a target figure and would not comment on whether financial markets were correct in pricing an eventual low of 2.0 to 2.25 per cent.

“It is not my present expectation we’re going to find ourselves at nothing,” Mr Stevens said.

The US has an interest rate target range of zero to 0.25 per cent, while the world’s second largest economy, Japan, has a benchmark rate of just 0.1 per cent.

Westpac chief economist Bill Evans, who had been expecting a 75 basis point rate cut next month, said Mr Stevens gave a “very clear” indication that he planned to slow the pace of rate cuts through 2009.

“We are still comfortable that the end (cash rate) low point will be two per cent, but the process of achieving that target will be more drawn out,” Mr Evans said.

He now expects a 25 basis point cut next month.

AAP