Financial markets are "dropping their bundle" but it's unclear whether the volatility will hurt the Australian economy, Reserve Bank governor Glenn Stevens says.
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Appearing before a parliamentary committee on Friday morning, Mr Stevens said the RBA still has the flexibility to cut interest rates further amid ongoing uncertainty about China's policy intentions and falling oil prices.
Asked about the recent market turmoil, Mr Stevens said "markets are dropping their bundle" and it was unclear how it would all pan out.
"One key question will be whether the recent financial turbulence itself will have a material negative effect on aggregate demand – in Australia or abroad. I don't expect that we will be able to answer that question for a little while yet," he said.
He said he could not explain why people were worrying about "latent issues" that had been present for some time.
In his opening statement, Stevens gave a relatively optimistic update on the economy.
Interest rate cuts could be cut to new record lows this year, he indicated.
"With inflation unlikely to cause a problem by being too high over the next year or two ... the board retains the flexibility to ease further, should that be helpful," he said.
He said the Chinese economy had become more of a concern for many observers but not because the data is changing too dramatically.
"The more recent anxiety is probably best described as greater uncertainty over the intentions of Chinese policymakers and over whether they will be able to carry off the economic transition that China needs," he said.
"This anxiety has been reflected in capital flows and in particular there's considerable private capital seeking to leave China."
Mr Stevens said real GDP is expanding at a pace "a bit lower than what we used to think of as normal".
But "modest" growth is still happening despite a very large contraction in capital spending in mining, restrained public spending and the reduction in national income coming from the declining terms of trade.
Labour force participation has picked up and unemployment is better than we expected this time last year, he said.
Commodity prices have generally fallen further in recent times, with the fall in crude oil prices the most prominent example.
He says while oil-producing companies and nations are seeing a decline in their incomes the news is not necessarily bad for Australia.
"We should not interpret the decline in oil prices as uniformly negative. On the contrary, a fall in oil prices resulting from additional supply has usually been seen clearly as a bonus for consumers and many businesses in advanced economies, including Australia," he said.
Looking ahead, forecasters expect a bit less growth in the global economy this year than they did a few months ago, he said.
"For Australia, the adjustment we have been experiencing for a couple of years now will most likely continue," he said.
