Australia to Consider Cutting Rates Next Month, Lowe Says

(Bloomberg) -- Australia’s central bank chief said he’ll consider easing monetary policy at next month’s meeting to drive faster hiring, saying unemployment needs to fall below 5% to help return inflation to target.

“A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target,” Governor Philip Lowe said in a speech in Brisbane Tuesday. “Given this assessment, at our meeting in two weeks’ time, we will consider the case for lower interest rates.”

Lowe’s confirmation of an easing bias followed the release of minutes of the Reserve Bank’s May policy meeting where it said recently downgraded growth forecasts would’ve been even lower if they hadn’t incorporated current market forecasts for two rate cuts. That came on the heels of regulators earlier today proposing to ease rules to allow home-buyers to borrow more, suggesting an injection in the offing for the housing market and economy.

A concession that easier policy is required reflects persistent labor market slack and mounting evidence of households reining in spending and slowing the economy. Unemployment climbed to 5.2% in April and inflation in the first three months of this year was tepid. The Australian dollar dropped on Lowe’s comments, buying 68.79 U.S. cents at 5:07 p.m. in Sydney.

“The labor market has surprised on the upside over recent times, and it could do so again,” said Lowe. “While we can’t rule out this possibility, the recent flow of data makes it seem less likely.” Still, Lowe said it was possible that current policy settings were sufficient to deliver lower unemployment.

In a Q&A session following the speech, the governor dismissed suggestions the RBA had held off from cutting this month because of Saturday’s election, which delivered a surprise victory for Scott Morrison’s coalition government.

Lowe said the vote had “no role at all” as the board comes to a decision “and implements that regardless of the political situation.” He said that the RBA has this year been reassessing what level of unemployment is compatible with the inflation target, and evidence had been mounting that it was below 5%. Data since the last meeting was consistent with that, he said.

The potential delay of proposed government tax cuts to next financial year could reduce household income growth by 0.3% this calendar year, said Lowe. The RBA is relying on tax relief to boost Australians’ disposable income growth to 4% in the next couple of years. It’s rising at an average pace of just 2.75% compared with 6% over the preceding decade.

“It would be good if there’s a way for the households to get those tax offsets,” he said.

What Bloomberg’s Economists Say

“Policy hawks have a good case for patience, as the outlook for the housing market and future household spending has significantly improved. But the labor market has loosened and it looks like it may take longer for underlying inflation to reach 2%.”

--Tamara Mast Henderson, Economist
Click here for the full report

Australia’s weakening economy has been reflected in slower global growth; similarly, the contradiction between relatively low unemployment and little inflation is also being played out internationally, suggesting these are worldwide factors.

Overlaying the downturn Down Under has been housing slump that eroded household wealth and added to nervousness among consumers. At a global level, there is also the unresolved trade dispute between the U.S. and China.

“Over the past year, global trade has not grown at all,” Lowe noted. “This is unusual as, historically, global trade has tended to increase at least as fast as GDP. This recent weakness partly reflects the slowing in the Chinese economy, but the increases in U.S. and Chinese tariffs are also a factor.”

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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