Lowe Says Monetary Policy Is Working as RBA Joins Race to Bottom

(Bloomberg) --

Australia’s central bank chief reaffirmed his faith in monetary policy just hours after cutting interest rates for a third time this year, despite the earlier moves so far mainly serving to refuel the housing market.

While the Reserve Bank board decided to cut the cash rate to a record-low 0.75% on Tuesday, it recognized that there were some undesirable effects from cutting rates, Governor Philip Lowe said. He mentioned the “many people” who wrote to him complaining that low rates were hurting their finances.

“The Board also recognizes that monetary policy still works,” Lowe said in notes of a speech delivered at a board dinner in Melbourne. “It works to support employment, jobs and income growth across the economy. Today’s decision, together with our decisions in June and July, will assist on each of these fronts.”

Click here to read more about Tuesday’s rate decision

In remarks mainly recapping the content of Tuesday’s policy statement, Lowe repeated his new favorite mantra: that Australia’s economy “appears to have reached a gentle turning point.” He said while the economy had been through a soft patch, the central bank’s board expected a return to “around-trend” growth over the next year.

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Lowe also outlined the board’s discussion on financial stability issues at its meeting Tuesday, ahead of the release of the six-monthly Financial Stability Review on Friday. He highlighted three key talking points:

• The disconnect between the uncertainty that investors feel about the economic situation and the compensation that they require for holding risk. A shock somewhere in the global system could cause a recalibration, leading to a disruptive repricing of risk
• Australia’s banks are well-placed to withstand a wide range of shocks -- but while lending standards have strengthened, in some areas “the pendulum may have swung a bit too far”
• While the Australian household sector has a high level of debt, it has also built up substantial buffers. While loan arrears have risen over recent years, they remain low

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