Lowe Signals RBA’s Pause to Persist Unless Unemployment Climbs

(Bloomberg) -- Australia’s central bank chief Philip Lowe signaled further interest-rate reductions are unlikely unless unemployment begins to climb and inflation is pushed further from its target.

“There are risks in having interest rates at very low levels,” Lowe said in a speech to the National Press Club in Sydney Wednesday. Lower rates could “encourage more borrowing by households eager to buy residential property at a time when there is already a strong upswing in housing prices in place. If that occurs, this could increase the risk of problems down the track.”

The governor said the coronavirus is a “new uncertainty.” While acknowledging that since the 2003 SARS epidemic China has become larger and more globally integrated, in that case, “there was a sharp slowing in output growth in China for a few months, before a sharp bounce-back.”

The Reserve Bank kept rates unchanged at a record-low 0.75% on Tuesday following three cuts in the second half of last year. Lowe offered a deeper analysis of the risks of further easing, pointing out that international experience showed rising concern about the effect of very low rates “on resource allocation and their effect on the confidence” of some people.

“There’s a concern that we could be getting close to a crossover point where what’s been a good thing may not be such a good thing in the future,” the RBA chief said in response to a question on the impact of low interest rates on the global economy.

Traders scaled back bets on an easing after the governor’s speech, pricing in little prospect of a cut in March, less than 50% in April and May, with bets gradually ascending from there. The Australian dollar was little changed after the address, trading at 67.38 U.S. cents at 3:06 p.m. in Sydney.

Lowe was asked after the speech to assess the balance of probabilities on rate moves. He all-but dismissed an increase, said it’s “possible” rates could come down, but added that he would prefer they didn’t as it would mean the bank isn’t making progress toward full employment and its inflation target.

“I hope, and I think it’s a reasonable expectation, is that we could have a period of stability again as we continue to make progress” toward lower unemployment and faster inflation, Lowe said.

Since the bank’s December meeting -- it doesn’t convene in January -- data has been a bit stronger. Unemployment fell to 5.1% in the final month of 2019 and job ads increased in January; inflation perked up a little to be in line with the bank’s forecasts; and house prices continue to rebound. Lowe suggested this supported his view of a “gentle turning point” in the economy.

The central bank estimates the wildfires that devastated Australia’s east coast will cut 0.2 percentage point from GDP across the December and March quarters, before reconstruction efforts take hold. The final result is that there’s unlikely to be any impact on overall growth for the year.

The RBA chief also reviewed the effects of the drought, and said a further decline of around 10% in farm output is expected to produce a drag on GDP growth of around a quarter of a percentage point in 2020. He then reinforced his point by saying “this is a stark reminder that the economic effects of these climate events are material.”

Lowe “pushed back” against critics of last year’s easing who argue that rate cuts are pointless because the effectiveness of policy is diminished and it actually hurts confidence. The governor said the cuts have lowered the currency, lifting the competitiveness of exporters, and maintains they have allowed households to strengthen their financial position, leaving them better placed to resume spending.

©2020 Bloomberg L.P.

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