RBA Chief Says He’s Ready to Ease Again, Sees Rates Staying Low

(Bloomberg) -- Australia’s central bank chief Philip Lowe said he’s ready to ease policy further if his back-to-back cuts fail to revive economic growth, adding households should expect “an extended period” of low interest rates.

Lowe said in a speech in Sydney Thursday that it could turn out that a combination of the consecutive rate reductions, tax cuts, higher commodity prices, a stabilizing housing market and infrastructure investment revitalize the economy and lift inflation.

“But if demand growth is not sufficient, the board is prepared to provide additional support by easing monetary policy further,” he said. “Whether or not further monetary easing is needed, it is reasonable to expect an extended period of low interest rates. On current projections, it will be some time before inflation is comfortably back within the target range.”

Lowe’s speech, which made the case for maintaining the RBA’s current policy framework despite prolonged low inflation, was his most explicit that further easing remains on the table. The Reserve Bank cut rates in June and July to a record low of 1% and signaled at the time that it would wait to see how the easing filtered through the economy.

Since then, consumer confidence has actually fallen and the currency has risen -- the latter due to an easing bias among major central banks -- in contrast to RBA’s hopes. Indeed, the Federal Reserve is expected to cut as soon as next week.

Westpac Banking Corp. Chief Economist Bill Evans on Wednesday predicted Lowe and co. would cut in October and February to push the cash rate to 0.5%.

The Aussie dollar dropped to a two-week low after the speech, down as much as 0.2% to 69.65 U.S. cents as traders boosted rate-cut bets. The yield on the October interbank cash-rate futures fell 3.5 basis points, increasing the odds for a reduction that month to more than 90%. The yield on benchmark 10-year notes declined to a record low 1.24%.

Asked after the speech whether his expectation of an extended period of low rates was a form of forward guidance, the governor demurred.

“I wouldn’t describe this as a shift in approach to kind of explicit forward guidance, it’s just consistent with this view that I’ve long had that we need to be as transparent as we can,’’ he said, explaining it simply reflected the view that it was hard to see inflation comfortably back in its target for some time.

Inflation Commitment

The governor made clear in his address that policy makers are determined to revitalize price growth. He again signaled that the government could do more to support the slowing economy and spur the hiring needed to drive down unemployment and rekindle inflation pressures.

“The board is strongly committed to making sure we get there and continuing to deliver an average rate of inflation of between 2 and 3 percent,” he said in his speech. “It is highly unlikely that we will be contemplating higher interest rates until we are confident that inflation will return to around the midpoint of the target range.”

--With assistance from Garfield Reynolds.

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

To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, ;Nasreen Seria at nseria@bloomberg.net, Peter Vercoe

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