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RBA’s Lowe Says ‘Not Unreasonable’ to Expect Another Rate Cut
2019-06-04 09:30:00.5 GMT

By Michael Heath
(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.”
Read more about Australia’s first interest-rate cut since
2016
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.
The RBA governor said the main downside risk to the 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.
Lowe 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.”
Lowe also addressed the gorilla in the room: Australia’s
eye-watering household debt levels and its associated risks to
the economy. He argued this concern “has receded recently” due
to tighter lending practices and banks becoming more risk
averse.
While the governor also noted 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.”

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