Reserve Bank Govenor, Phillip Lowe, knows that surprising investors by cutting rates before November – in the absence of a major financial or geopolitical shock – would only fuel morbid speculation that the outlook for the Australian economy is much grimmer than it actually is.
By Karen Maley
One of the lessons that prudent central bankers learn in the course of their careers is the importance of avoiding unnecessary surprises.
Lowe is well aware that there is little to be gained from a premature rate cut.
It would provide little tangible benefit to the broader economy, but would certainly risk rattling financial markets and fuelling damaging rumours about the frailty of the economy.
Still, it’s also clear that, in the absence of some unexpected and powerful display of strength, official interest rates are set to move inexorably lower.
The Reserve Bank’s latest economic forecasts are based on the technical assumption that there will be two rate cuts by the middle of next year.
Even on this basis, however, inflation is to remain stubbornly stuck below the Reserve Bank’s target range until 2021.
As Lowe acknowledged in his statement on Tuesday, “inflation pressures remain subdued and this is likely to be the case for some time yet.”
What’s more, economic activity, which was dragged down in the first half of the year by weak wages growth and falling house prices, is unlikely to enjoy a spectacular rebound.
According to Lowe, “growth in Australia is expected to strengthen gradually to be around trend over the next couple of years”.
Meanwhile, the jobless rate is expected to remain at 5.2 per cent for at least another year, well above the 4.5 per cent level that the Reserve Bank now believes the economy can support without fuelling excessive wage increases.
There is, of course, a very slight chance that the Reserve Bank’s forecasts could turn out to be unduly pessimistic and that economic activity, jobs growth and inflation might show a surprising resilience.
In that case, there would be no need for the Reserve Bank to push rates below the record low 1 per cent level.
But this would represent an extraordinary turnaround in the economic figures, which have been painting a patchy, slightly disappointing picture of the economy.
More importantly, Lowe appears to have resigned himself to a further decline in interest rates.
The board, he noted, will continue to monitor developments and will “ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time”.
First published in The Australian Financial Review – Wednesday 4 September 2019.
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