RBA May Ease Further But Negative Rates Unlikely, Lowe Says

(Bloomberg) --

Australian central bank chief Philip Lowe reiterated that he’s prepared to ease policy further if needed, but again pushed back against the idea of interest rates turning negative in his economy.

The Reserve Bank’s board has reduced borrowing costs three times in the past five months as it tries to boost economic growth and encourage hiring. At 0.75%, the record-low cash rate is also helping keep a lid on the local currency as other major central banks ease in response to heightened international risks, ranging from the U.S.-China trade war to Brexit.

“We are confident that these reductions are helping the Australian economy and supporting the gentle turning point in economic growth,” Lowe said Tuesday in the text of a speech in Canberra. “Low interest rates are supporting jobs and overall income growth. At the same time, though, we recognize that monetary policy is not working in exactly the same way that it used to.”

The governor delivered his remarks in the Sir Leslie Melville Lecture, which commemorates one of Australia’s pre-eminent economists of the interwar and post-World War II years. In his address, Lowe surveyed the global problem of high savings and low investment, noting issues ranging from aging populations to companies’ reluctance to invest.

Not Negative

In terms of monetary policy, he reiterated many of the themes of recent speeches.

“The board is prepared to ease monetary policy further if needed,” Lowe said. “Having said that, it is extraordinarily unlikely that we will see negative interest rates in Australia. It is likely though that we will require an extended period of low interest rates to reach full employment and for inflation to be consistent with the target.”

Fielding questions after the speech, Lowe said Australia’s rising house prices reflect the impact of low interest rates. He added that it’s not surprising people would take advantage of low rates to pay down their mortgages more quickly, urging homeowners to take advantage of the current environment to refinance if they’re so inclined.

Lowe said the transmission of previous rate cuts has worked “reasonably well.” So far about 60 basis points of the 75 basis points in total cuts has been passed on to consumers, a figure that’s likely to rise as high as 70 as competition among banks kicks in, Lowe said. He acknowledged that the effectiveness of cuts diminishes as rates go lower.

He called on business and governments to work to lift confidence about future growth prospects, and to expand and innovate.

“As is the case internationally, the focus needs to be on an improvement in the investment environment, so that investors are prepared to take Melville’s cue and use low funding costs to build new productive assets,” the RBA governor said.

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, Michael S. Arnold, Michelle Jamrisko

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