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Reserve Bank governor Philip Lowe has given the strongest indication yet that another cut in the official interest rates will be delivered next week in a concerted effort to drive unemployment down.
Key points:
- RBA governor Philip Lowe says Australia will not return to strong economic growth in the short term
- Dr Lowe indicated the board was prepared cut interest rates to tackle rising unemployment
- Weak household spending from low wage growth and a high tax take were identified as the biggest problem for the domestic economy
Dr Lowe told a business function at Armidale in regional New South Wales on Tuesday night he was not expecting a return to strong economic growth in the short term, even if rates were cut again.
Dr Lowe said the interest rate cuts in June and July this year were aimed at lowering unemployment to generate wages growth and push inflation back to the RBA's desired 2-3 per cent band.
However, if anything, the situation has deteriorated further.
Last week's jobs data revealed unemployment ticked up to 5.3 per cent in August, failing to respond to either the successive interest rate cuts or the tax offset payments.
"The decisions to ease monetary policy in June and July were taken to help make more assured progress towards full employment and the inflation target. Further monetary easing may well be required," Dr Lowe said.
The RBA argues unemployment needs to fall to 4.5 per cent to meet its definition of "full employment".
Prepared to cut again
Dr Lowe noted financial markets are pricing in further reductions in the cash rate over the next year, below the current historic low of 1 per cent.
"At our board meeting next week, we will again take stock of the evidence," he said.
"It is nevertheless likely that an extended period of low interest rates will be required in Australia.
"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," Dr Lowe added.
Up until the August unemployment data was released, the market had priced in only a 20 per cent chance of an October rate cut.
However, the odds flipped last week, and were sitting at an almost 80 per cent chance of a cut before the details of Dr Lowe's speech were released.
No short-term strength
While another cut, or two, is on the cards, Dr Lowe indicated he wasn't expecting immediate results.
"Having been through a soft patch, a gentle turning point has been reached.
"While we are not expecting a return to strong economic growth in the near term, we are expecting growth to pick up."
He noted the main source of domestic uncertainty remained the weakness of household spending.
"Over the past year, there has been no growth at all in consumption per person, which is an unusual outcome at a time when employment is growing strongly," he said.
"An important part of the explanation here is that household disposable income has been increasing only slowly for an extended period, reflecting both subdued wage increases and strong growth in taxes paid," Dr Lowe noted.
"More broadly, the correction in the housing market has also affected the economy through its impact on residential construction activity."
He added the drought across eastern states was also having an impact, particularly in regional communities and had made food such as bread, milk and meat more expensive.
Global risks
Dr Lowe also warned global risks also posed significant challenges.
"The main message on the global economy is that while it is still growing reasonably well, the risks are increasingly tilted to the downside.
"The most prominent of these are the trade and technology disputes between the United States and China. Others include the Brexit issue, developments in the Middle East, the problems in Hong Kong and the tensions between Japan and South Korea."
Dr Lowe said the US-China dispute was having a particularly worrying impact on international trade.
"Over the past year there has been no growth at all in international trade, despite the global economy growing at a reasonable rate."
That impact has seen a significant cooling in factory output, particularly in developed economies, with German manufacturing now experiencing recessionary conditions and the weakest output since the GFC.
Topics: business-economics-and-finance, money-and-monetary-policy, australia
First posted