• The RBA will “consider the case for lower interest rates” at its June 4 meeting.
• RBA Governor Philip Lowe says recent economic data “makes it seem less likely” that unemployment will fall further with policy settings as they currently are.
• Australian inflation is already weak and progress in boosting wage growth is glacial. Higher unemployment is not consistent with either of those trends changing anytime soon.
• Lowe said Australia’s next government may have a role to play in helping to boost the Australian economy.

The Reserve Bank of Australia (RBA) will “consider the case for lower interest rates” at its June 4 meeting.

“At our meeting in two weeks’ time, we will consider the case for lower interest rates,” Lowe said in a speech delivered to the Economic Society of Australia in Brisbane on Tuesday.

While stopping short of definitively answering the question as to whether or not it will reduce Australia’s cash rate, Lowe’s admission is the clearest signal yet that the bank is considering easing policy settings for the first time since August 2016.

On the outlook for labour market conditions, something that RBA had previously pinned its hopes on to help boost wage pressures and economic growth and return inflation to its 2-3% medium-term inflation target, Lowe acknowledged that recent indicators were not all that convincing that such a scenario may play out.

“Recently … some labour market indicators have softened a little,” Lowe said.

“The unemployment rate ticked up to 5.2% in April, the underemployment rate has also moved a little higher as there are more part-time workers who are seeking additional hours, job advertisements have declined, and hiring intentions have come off their earlier highs.”

While Lowe noted that total job vacancies, as measured by the Australian Bureau of Statistics, remained at record levels, he said other leading labour market indicators suggest unemployment may not fall further with current monetary policy settings in place.

“My judgment of the accumulating evidence is that the Australian economy can support an unemployment rate of below 5% without raising inflation concerns,” Lowe said.

“It is possible that the current policy settings are sufficient to deliver lower unemployment. The labour market has surprised on the upside over recent times, and it could do so again.

“While we can’t rule out this possibility, the recent flow of data makes it seem less likely.”

Lowe said recent Australian inflation data had come in lower than the RBA expected. He also acknowledged that despite some progress in lifting wage growth in recent years, current levels were “lower than the rate that would appear consistent with inflation being comfortably within the target range”.

With upside risks to unemployment increasing, at a time when inflation and wage growth is already very weak, it underlines why the RBA is openly talking about the prospect of cutting official interest rates in June in order to stimulate the economy.

However, Lowe delivered a not-so-subtle message to Australia’s newly-elected government that it too has a role to play in this task.

“In the event that the unemployment rate does not move lower with current policy settings, there are a number of options,” he said.

“These include: further monetary easing, additional fiscal support, including through spending on infrastructure, and structural policies that support firms expanding, investing and employing people.

“Relying on just one type of policy has limitations, so each of these is worth thinking about.”

Given Australia’s improved fiscal position, far stronger than at any point in the past decade thanks to continued strength in hiring and booming commodity prices, the new government has the opportunity and means to support the Australian economy.

While the continued focus on returning the budget to surplus is understandably appealing from a political standpoint, if it comes at the cost of stalling the Australian economy, the budget is unlikely to remain in the black for long.

A little bit of additional fiscal stimulus, accompanied by monetary policy easing, would go someway to reducing downside risks for the economy.

As Lowe suggests, this is worth thinking about.

Following Lowe’s speech, financial markets now put the probability of a 25 basis point rate cut next month at 90%.

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