RBA’s Lowe Says ‘Not Unreasonable’ to Expect Another Rate Cut

(Bloomberg) -- Australia’s central bank chief strongly suggested he could follow up Tuesday’s interest-rate cut with another reduction as he seeks to drive down unemployment and revive inflation.

“The board has not yet made a decision, but it is not unreasonable to expect a lower cash rate,” Governor Philip Lowe said in an evening speech in Sydney. “Our latest set of forecasts were prepared on the assumption that the cash rate would follow the path implied by market pricing, which was for the cash rate to be around 1% by the end of the year.”

The Reserve Bank earlier ended a nearly three-year pause in policy adjustments when it eased the cash rate to 1.25%. Lowe in his speech cited an “accumulation of evidence” that inflation pressures will remain subdued and “significant spare capacity” in the labor market. His cut comes as pressure mounts on the Federal Reserve to hand back some of its tightening.

Asked after the speech where he now saw the lower bound of the RBA’s cash rate, Lowe referred to recent global experience.

“If you look at what happened in the U.K., the U.S. and Canada, rates got to 0.25-0.5% there, so I think for many economies that’s judged to be the effective lower bound,” he said. “I’m not anticipating to get to those levels.”

RBA’s Lowe Says ‘Not Unreasonable’ to Expect Another Rate Cut

Lowe in his speech said the main downside risk to the economic outlook was global trade disputes that have “intensified recently,” echoing St. Louis Fed chief James Bullard, who warned Monday that a U.S. easing “may be warranted soon” for the same reason. That marked the first time a Fed official has publicly suggested the need for a cut since the U.S. held rates in January.

“Unless the bank becomes more bearish on the central economic outlook, a move below 1% is not imminent,” David Plank, head of Australian economics at Australia & New Zealand Banking Group Ltd., said in a note after the speech. “Given recent global developments, the bank may indeed become more bearish and so think there is more to do than a cumulative 50 basis points of cuts.”

The governor broke with his usual practice of not insisting Australia’s major banks pass the rate cut through in full, citing their lower funding costs and fall in retail deposit rates to argue there was no excuse for holding back.

“Full pass-through would also mean that the economy receives the full benefit of today’s policy decision,” he said.

Two of the major four banks have failed to pass on the whole cut, while the others did.

Hard Target

The governor warned inflation is “unlikely to be comfortably” in the RBA’s 2-3% range for some time yet, as the level at which unemployment spurs faster inflation is now lower and the economy can sustain a jobless rate of “4 point something.”

In the Q&A session, Lowe said that if unemployment can be pushed down to around 4.5%, then he’s confident that inflation will rise back to within the central bank’s target range.

Lowe also addressed the gorilla in the room: Australia’s eye-watering household debt levels and its associated risks to the economy. In the speech, he argued this concern “has receded recently” due to tighter lending practices and banks becoming more risk averse.

Savers Hit

While the governor also expressed sympathy for the nation’s savers, who have been battered by relentless rate reductions since late 2011, he argued that the easing boosted the broader economy.

“In aggregate, the household sector pays around two dollars in interest for every dollar it receives in interest income,” he said. “So, in aggregate, lower interest rates reduce the net interest payments of the household sector and so boost overall disposable income.”

Finally, the RBA chief lobbed the stimulus ball squarely back in the re-elected government’s court, warning of too much reliance on low rates. Governments can support the economy via investment in infrastructure and most importantly through “structural policies” that encourage firms to expand, invest, innovate and hire, he said.

“A strong dynamic business sector is the best way of creating jobs,” said Lowe. “Structural policies not only help with job creation, but they can also help drive the productivity growth that is the main source of improvement in our living standards. So, as a country, it is important that we keep focused on this.”

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