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Lowe Reiterates RBA Rate Cut on Table as Spare Capacity Persists

Lowe Reiterates RBA Rate Cut on Table as Spare Capacity Persists

(Bloomberg) -- Australia’s central bank chief Philip Lowe reiterated that it was “not unrealistic” to expect a further interest-rate cut.

The quarter-point reduction to a record-low 1.25% this month was unlikely to “materially shift” the current trajectory of slower economic growth and static unemployment, Lowe said in a speech that explained why the labor market has been central to recent policy decisions.

“The possibility of lower interest rates remains on the table,” he said. “It is not unrealistic to expect a further reduction in the cash rate as the board seeks to wind back spare capacity in the economy and deliver inflation outcomes in line with the medium-term target.”

Traders saw more than a 70% chance of a July rate cut following the speech, compared with about 50% before its release.

The RBA’s easing on June 4 was its first in almost three years, as it tries to push unemployment down and reignite inflation. The central bank has lowered its full employment estimate to a jobless rate of about 4.5% -- it currently stands at 5.2%. Meantime, economic growth has slowed to an annualized 1.2% over the past nine months, well below its estimated speed limit of 2.75%.

Jobs Market

In Thursday’s address, delivered in the southern city of Adelaide, Lowe’s conclusion was that there is more to do on the jobs market despite strong hiring in the past 2-1/2 years.

“We remain short of the unemployment rate associated with full employment, there is significant underemployment and there is further potential for labor force participation to increase when the jobs are there,” he said. “The most recent data –- including the GDP and labor market data –- do not suggest we are making any inroads into the economy’s spare capacity.”

Since last month’s shock re-election of Australia’s center-right government, business confidence has improved, but most other gauges remain weak. That’s even before the risks associated with the U.S.-China trade dispute. Given the RBA’s limited policy ammunition, it will need government help to push down unemployment and revive inflation.

“One option is fiscal policy, including through spending on infrastructure,” he said. “Another is structural policies that support firms expanding, investing, innovating and employing people.”

Asked three times after the speech whether the RBA would cut at next month’s meeting in the northern city of Darwin, the first there in some 50 years, the governor was coy.

“There’s a high probability that interest rates will be cut again, whether that occurs in our historic meeting in Darwin or back in Martin Place I don’t know,” he said to the third question on whether it was possible an easing could come in the next fortnight.

On where the lower bound of interest rates lies, Lowe reiterated that he was reluctant to visit levels seen in the U.K., Canada and U.S., of 0.25%-0.5%. He also noted that the Swiss National Bank had gone to -0.75% and the European and Swedish central banks had gone into negative territory as well.

“So it’s technically possible. But I am very hopeful that we will not need to go, certainly into negative territory, or to these very low interest rates,” the governor said. “One reason that I say that is because the central scenario for the Australian economy still remains quite reasonable.”

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

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

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