RBA Chief Sees Australia Economy Picking Up, Fails to Signal Imminent Cut

(Bloomberg) --

Reserve Bank chief Philip Lowe said Australia’s economy is at a “gentle turning point” and reiterated he’s prepared to cut interest rates if needed to support the recovery, while stopping short of flagging the imminent move markets and some economists were factoring in for next week.

As a small, open economy, Lowe said he couldn’t overlook the global shift toward more monetary easing. "If we did seek to ignore these shifts, our exchange rate would appreciate, which, in the current environment, would be unhelpful in terms of achieving both the inflation target and full employment," the RBA governor said in a speech Tuesday evening.

The Australian dollar rose and bets on a reduction from the current 1% cash rate at the Oct. 1 meeting declined after the remarks failed to clearly signal a near-term move, as he had done in May ahead of a subsequent cut in June. Still, there was enough in his comments for both hawks and doves, setting up a line-ball decision.

“At our board meeting next week, we will again take stock of the evidence,” Lowe said in the speech delivered in the regional New South Wales city of Armidale. “The board is prepared to ease monetary policy further if needed to support sustainable growth in the economy, make further progress towards full employment, and achieve the inflation target over time.”

The RBA eased in June and July and Lowe reaffirmed Tuesday that an extended period of low rates was on the cards, as ongoing uncertainty abroad and weak household spending at home drag on the economy. The governor noted that over the past year there has been “no growth at all in consumption per person,” a result he described as unusual given hiring has remained strong.

“We are now in the midst of an easing cycle and there is no need to provide explicit forward guidance ahead of any particular meeting. The RBA’s clear easing bias was reiterated” in Lowe’s speech, said Gareth Aird, senior economist at Commonwealth Bank of Australia. “The added emphasis that the RBA is placing on global economic developments supports our view that they will ease policy next week.”

Traders are pricing in about a 70% chance of a cut at the October policy meeting, rising to 86% in November.

‘Modest Pick-Up’

In predicting an upturn in the economy, the RBA chief noted that GDP growth over the first half of this year was stronger than in the second half of 2018 and said the RBA is expecting “a further modest pick-up” in the quarters ahead.

That’s based on his frequently mentioned combination of tailwinds: rate cuts and tax refunds, a weaker currency, and infrastructure and mining investment. Lowe estimates that the government’s cash rebate will boost aggregate household income by 0.6% this year, adding that past experience suggests that around half of the tax refunds will be spent.

In addition, there hasn’t been “the same spike in the measure of policy uncertainty in Australia” seen in the world economy, he said. “There has, however, been some softening in measures of business conditions.”

Reluctant Cutter

The RBA’s back-to-back rate cuts have already begun to show up in a strengthening Sydney and Melbourne property market, but are likely to take longer to flow through the economy, perhaps explaining some reluctance to resume easing so soon.

Still, Lowe highlighted that while Australia’s floating exchange rate gave it some policy flexibility, as a small, open economy it can’t remain impervious to what global central banks are doing. This month both the U.S. and Europe have eased in response to international volatility, from the U.S.-China confrontation to Brexit to Hong Kong to South Korea-Japan, that’s discouraging investment.

Curiously, while the governor mentioned the economy’s “gentle turning point” three times in his address, reiterating a comment from August, he failed to call on the government to increase fiscal support for the first time in a while. That likely reflects a realization that with Treasurer Josh Frydenberg recommitting to a budget surplus in fiscal 2020 and maintaining the government is doing enough to support the economy, there’s little to be gained.

“Regardless of the short-term outlook for monetary policy, the point about the solution to low global rates is relevant here in Australia too,” Lowe said. “We will all be better off if businesses have the confidence to expand, invest, innovate and hire people. Given Australia’s strong fundamentals, this is not out of our reach, but it does require constant effort.”

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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