"And prices can fall; they have fallen; I think since I've been in this job we've seen them fall two or three times." Setting Australia's interest rate isn't rocket science says outgoing RBA governor, but what is the process behind the decision. Credit:Ben Rushton Follow-up rate cut speculation Mr Stevens' remarks, the penultimate in a public forum before he stands down in September after 10 years in the job, comes amid rising speculation that the RBA will follow up its May cash rate cut, the first in a year, with another 25 basis point reduction, to 1.5 per cent. The May cut came less than a week after after a shock drop in core inflation to well below the central bank's 2 per cent to 3 per cent target band.

Although admitting inflation was "very low", he defended the bank's target band, saying there were no plans to alter it according to current conditions. He also defended inflation-targeting, by which consumer price and wage inflation help determine interest rate settings from month to month. Despite commentary questioning the system's relevance in a world of low inflation and negative real interest rates in some countries, inflation targeting had stood the test of time and would continue to, Mr Stevens said. "It is not at all a very rigid thing that demands knee jerk responses on our part," Mr Stevens said. "It has got adequate flexibility to look at the broad picture."

The Australian dollar, which has been flirting with multi-month lows, dropped another half a US cent on the comments, to US71.83¢. It later recovered some ground, to US71.98¢. Mr Stevens is widely viewed as a reluctant rate-cutter, doubting the efficacy of easing below a certain point and fearing runaway house price inflation in some of Australia's capital cities. However, there are fears now that a glut of apartments in some cities will ultimately drive down prices across the market, despite the record low interest and mortgage rates. Risky lending crackdown Mr Stevens said a crackdown by the Australian Prudential Regulation Authority and banks on risky lending had "worked pretty effectively to calm down that part of the market that was showing the most exuberance".

However, he said it was too early to tell if a property overhang was emerging. "I suppose as an economist, I would say that if supply and demand are equilibrating without massive changes in pricing, that sounds like a market working quite well," he said. "Whether in two years' time that's how the market will look, I don't know, but we certainly were not building enough [houses] at one point. "We're much closer now, at least in numbers, to the sort of position we need in terms of population growth," he said. "Whether we have the right dwellings in the right places is another question, and that's a more complex one to answer."