Negative Rates in Australia Extraordinarily Unlikely, Lowe Says
Philip Lowe, governor of the Reserve Bank of Australia (RBA), speaks during the RBA Board Dinner at the Melbourne Museum in Melbourne, Australia. (Photographer: Carla Gottgens/Bloomberg)

Negative Rates in Australia Extraordinarily Unlikely, Lowe Says

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(Bloomberg) -- Interest rate cuts are supporting Australia’s economy and housing market, Reserve Bank governor Philip Lowe said.

“The economy has been through a very soft patch over the past year but it is actually gradually improving, the lower interest rates are working,” Lowe said during a panel event at the International Monetary Fund’s annual meetings in Washington.

Highlighting an upswing in the commodities industry, Lowe said the housing market also “has now turned around, so that is going to support consumption.”

Negative Rates in Australia Extraordinarily Unlikely, Lowe Says

A return to trend growth over the next year will support the labor market, according to Lowe.

Negative Reaction

Lowe pushed back against a suggestion by an audience member that Australia is headed for unorthodox monetary policy such as negative interest rates.

“I don’t think it’s the right assumption to make that we are going to have a lot more work to do to get inflation back to target and growth back to trend,” he said.

He later said negative interest rates are unlikely.

“I’m not going to speculate on negative interest rates or quantitative easing in Australia other than to say I think negative interest rates are extraordinarily unlikely in my country.”

Australia’s central bank has cut interest rates three times since June and has said it may ease even further, venturing deeper into levels where unconventional measures may need to be adopted. The easing is in part designed to prevent a rebound in the depreciating currency that might have been triggered if the RBA stood pat while global counterparts eased.

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 have been confirmed locally, with data showing the RBA’s June and July cuts had reawakened Australia’s dormant property market at a time when households are already saddled with record debt levels. House prices rose the most since March 2017 last month, led by east-coast hot spots Sydney and Melbourne.

Risks, Benefits

However, the central bank remains confident that the case for taking the cash rate into uncharted territory outweighs the risks posed by its dwindling firepower.

Minutes from this month’s board meeting, where it cut to a record-low 0.75%, showed there was some concern among members that even looser policy could refuel asset prices and leave the economy vulnerable to a negative shock.

Still, the board concluded that threats to global growth, ongoing easing among the central bank’s major peers and a stubborn unemployment rate at home warranted the October move. Markets see another cut within six months; two of the nation’s most-watched economists, Westpac Banking Corp.’s Bill Evans and JPMorgan Chase & Co.’s Sally Auld, think Lowe will move again in February.

©2019 Bloomberg L.P.

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