Australia Cuts Rates to Record-Low 0.75% as Global Risks Mount

(Bloomberg) -- Australia’s central bank was dragged further into the global easing tide as it cut interest rates for the third time this year, even as it risks refueling excesses that Governor Philip Lowe warned against just weeks ago.

The Reserve Bank reduced the cash rate by 25 basis points to a record-low 0.75% and said it may ease even further, venturing deeper into levels where unconventional measures may need to be adopted. The move is in part designed to prevent a rebound in the depreciating currency that might have been triggered if it stood pat while global counterparts eased.

“The global race to the bottom is, in a sense, dragging the RBA along,” said Michael Blythe, chief economist at the Commonwealth Bank of Australia. “Failure to participate could see the Australian dollar move higher.”

Global risks from the U.S.-China conflict to Hong Kong riots have forced Lowe to tilt from a stubborn focus on financial stability that defined the start of his tenure three years ago. Only in August, he was warning global policy makers at the Jackson Hole symposium that easier monetary conditions will “push up asset prices, which brings its own set of risks.”

Lowe’s fears were confirmed locally just hours before Tuesday’s decision, with data showing the RBA’s June and July cuts had reawakened Australia’s dormant housing market at a time households are already saddled with record debt levels. Prices rose the most since March 2017, led by hot spots Sydney and Melbourne.

“The board took account of the forces leading to the trend to lower interest rates globally and the effects this trend is having on the Australian economy and inflation outcomes,” Lowe said in his statement Tuesday. It “will continue to monitor developments, including in the labor market, and is prepared to ease monetary policy further if needed.”

The Australian dollar declined, trading at 67.06 U.S. cents at 4:15 p.m. in Sydney, compared with 67.48 cents before the decision.

What Bloomberg’s Economists Say

“The RBA continued to signal willingness to ease policy further, if needed. That should continue to keep a rein on the Australian dollar, further nurturing a recovery.”

--Tamara Mast Henderson, Economist

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Tuesday’s cut is also designed to give maximum kick to a “gentle turning point” that Lowe says he sees in the economy following a year of weak growth. The governor is similarly trying to stem unemployment -- which climbed to 5.3% in August as a swelling labor force overwhelmed an increase in hiring -- and bolster consumer confidence in order to revive household spending.

“Forward-looking indicators of labor demand indicate that employment growth is likely to slow from its recent fast rate,” Lowe said. “The economy still has spare capacity and lower interest rates will help make inroads into that.”

Lowe wants to stoke the local economy hard to try to ensure its resilience. At 0.75%, the cash rate is close to the lower bound that he and Deputy Governor Guy Debelle estimate is around 0.25%-0.5%. Both have previously said they don’t expect to have to turn to bond buying and other alternative measures, as they wait and gauge the success of existing stimulus.

“The Reserve Bank is likely to cut again early next year,” said Callam Pickering, economist at global jobs site Indeed. “Bank officials are reluctant to discuss quantitative easing but it becomes a real possibility the closer we come to a cash rate of 0%.”

Lowe is scheduled to speak at the RBA board dinner later Tuesday, at 7.20 p.m. in Melbourne. There will be no Q&A session.

To contact the reporters on this story: Michael Heath in Sydney at mheath1@bloomberg.net;Chris Bourke in Sydney at cbourke4@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Malcolm Scott, Chris Bourke

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