RBA’s Lowe Comes Under Increasing Pressure to Cut Rates Below 1%
Australia’s central bank chief Philip Lowe faces another year of shouldering the burden of economic stimulus as the government prioritizes a budget surplus over turning around the weakest expansion in a decade.
Lowe, who will deliver a speech Tuesday evening in the regional city of Armidale, is under intensifying pressure to reduce the cash rate from the current 1%, with a swathe of economists switching to rate cut-calls for next week’s policy meeting. That’s after Treasurer Josh Frydenberg last week announced a tiny A$700 million ($475 million) deficit in the fiscal year just gone and recommitted to returning the books to the black in 2020.
Just an hour after the Treasurer’s forecasts, data showed an unexpected climb in the jobless rate, signaling additional labor-market slack and bolstering the case for stimulus. Annualeconomic growth in the second quarter was the weakest since the global recession and even below the 1.6% rise in population.
Despite the sluggishness, a combined windfall from a spike in commodity prices and solid hiring has helped push the budget back to near its first surplus since fiscal 2008. With its focus firmly on reaching that goal, the government maintains that its tax cuts and existing infrastructure spending are sufficient economic support.
“Given the weaknesses in domestic demand and with the policy rate close to zero, the government are coming under some pressure to ease,” said Tyson Goddard at BIS Oxford Economics. “In the event of a negative shock, in particular one that affects the labor market, this pressure would increase.”
Money markets are pricing in about an 80% chance of a cut at the Reserve Bank’s Oct. 1 meeting. The RBA has traditionally preferred to adjust rates in November as that meeting followed a report on inflation -- due Oct. 30 -- and is held in the week it releases updated quarterly forecasts -- due Nov. 8.
With inflation’s prolonged period below the RBA’s 2-3% target, there’s less need to wait for the CPI report than in the past. Australia is not alone in facing weak price growth and easing rates, with central banks across the world following a similar path amid slowing global growth and the protracted confrontation between the U.S. and China.
Lowe has about two cuts left before reaching the upper level of the 0.25%-0.5% range he and Deputy Governor Guy Debelle have nominated as the likely lower bound for policy Down Under. That leaves the RBA close to the territory where other central banks have turned to quantitative easing.
“We have long held the view that fiscal easing would be the better policy option than further monetary policy easing, especially with the RBA within reach of the lower bound,” said Belinda Allen, a senior economist at Commonwealth Bank of Australia, the nation’s largest lender.
Potential measures she cited include: bringing forward “shovel ready infrastructure projects,” particularly in regional Australia; and bringing forward the tax cuts scheduled for July 1, 2022.
Treasurer Frydenberg has dismissed concerns about the outlook for the economy. “We continue to grow,” he told reporters last week when announcing the final budget outcome for fiscal 2019.
Lowe’s speech starting at 8:05 p.m. local time is titled ‘An Economic Update.’ That has echoes of the title of his Brisbane address in May -- ‘The Economic Outlook and Monetary Policy’ -- when the governor signaled further interest-rate cuts were imminent. The RBA went on to lower rates by a quarter percentage point in June and again in July.
©2019 Bloomberg L.P.