Australia Central Bank Set to Cut Rates to Fresh Record Low
Australia Central Bank Set to Cut Rates to Fresh Record Low
(Bloomberg) -- Australia’s central bank is set to end an unprecedented pause in interest-rate cuts as it ratchets up efforts to revive inflation, a goal some economists say will require stimulus that tests the lower bounds of policy.
Markets and economists are all but certain the Reserve Bank will lower the cash rate to a fresh record of 1.25% Tuesday in its first move since August 2016. Governor Philip Lowe hopes that will help push unemployment below 5% to drive faster wage growth; yet international experience suggests even a jobless rate closer to 4% could take time to spur faster inflation.
Bill Evans, chief economist Westpac Banking Corp. thinks the central bank will need to cut three times in the next six months. On the prospect of quantitative easing if the cash rate goes below 1%, he’s not convinced that’s on the cards.
“Central banks have always favored interest rate policy over QE until they believed that rate policy flexibility had passed or further lowering rates would be ineffective,” said Evans. “They have also mainly favored QE to ease credit conditions rather than boosting demand.”
Lowe has switched to a more conventional policy focus after spending his first 2-1/2 years as governor deflating asset prices and strengthening the financial system -- key pillars of his broader vision of central banking. Yet he’s been forced to return to the same puzzle confronting his peers across the globe: consumer prices that defy very easy policy and extremely tight labor markets.
Traders only started expecting RBA cuts after the U.S. pivoted from hikes, with their bets really gaining pace when markets decided Federal Reserve easing was looking more likely. They’re pricing in a better than 90% chance of two Australian rate cuts in the next quarter, and the potential for a 50 basis-point move Tuesday has also been flagged.
Lowe might put some more flesh on his traditionally bare-boned policy statements when he delivers a speech to the business community at the RBA’s board dinner in Sydney this evening.
The RBA chief says he still believes in the fundamental tenets of supply and demand: that the available workforce will eventually become so thin that employers will have to pay higher salaries and that in turn will spur inflation. He’s having to bet all his chips on wages as the government tries to push down power prices and annual hikes in tobacco excises come to an end.
But there are also signs of an unraveling of the labor-market strength Lowe had used to justify not cutting. Job advertisements slumped 8.4% in May, the biggest fall in more than 9 years. However, Australia & New Zealand Banking Group Ltd., which runs the survey, said the result was likely skewed by May’s election and a cluster of public holidays in late April.
To drive unemployment lower, Lowe needs the economy to be expanding above its 2.75% speed limit, and in the near-term that’s unlikely: economists predict GDP rose an annual 1.8% in the first three months of 2019, almost a percentage point below potential.
So Lowe’s starting a long way behind colleagues in the U.S., the U.K., Japan and Germany, where unemployment is already exceptionally low. And while wages are rising in some of those economies, inflation remains relatively contained.
The RBA chief still has one significant advantage: the currency has tumbled 25% in the past five years and will likely fall further if the cash rate does.
--With assistance from Garfield Reynolds.
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
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