Maybe the Reserve Bank will cut its key cash rate for a third time this year at next Tuesday’s meeting (market forecasts are for the cut to come ahead of the running of the Melbourne Cup on the first Tuesday in November), but Governor Phillip Lowe made it clear last night that low-interest rates are here to stay for “an extended period” of time.
In a speech delivered in the northern NSW regional city of Armidale, Governor Lowe made it very clear that the bank is prepared to continue cutting rates to help support “sustainable growth in the economy, cut unemployment and push inflation towards the target range of 2% to 3% over time.
At the same time, he sounded a small note of optimism about the current health of the economy which he says may have reached “a gentle turning point” with an upturn on the way. That improvement doesn’t sound all that earth-shattering, hence Dr. Lowe’s use of the word ‘gentle’ to describe what could be a modest improvement.
While he has made similar comments in recent months in speeches and in his post-board meeting statements (and they have also appeared in the minutes of those meeting, the tenor of last night’s speech makes it clear Dr. Lowe will not be dissuaded from pushing rates lower if needed.
“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. While we are at a gentle turning point and expect growth to pick up, the strength and durability of this pick-up remains to be seen.
“At our Board meeting next week, we will again take stock of the evidence. It is nevertheless likely that an extended period of low-interest rates will be required in Australia to make progress in reducing unemployment and achieving more assured progress towards the inflation target. 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.
“Regardless of the short-term outlook for monetary policy, the point about the solution to low global rates is relevant here in Australia too. We will all be better off if businesses have the confidence to expand, invest, innovate and hire people. Given Australia’s strong fundamentals, this is not out of our reach, but it does require constant effort.”
But there was a small note of optimism in his speech. Dr. Lowe repeated a phrase he first used in his appearance on August 9 before the House of Representatives Economics Committee he said “economy may have reached a gentle turning point. “ In his speech on Tuesday night he said:
“Looking forward, there are some signs that, after a soft patch, the economy has reached a gentle turning point. This is evident in the fact that GDP growth over the first half of this year was stronger than it was over the second half of last year. We are expecting a further modest pick-up in the quarters ahead.
“This outlook is supported by a number of developments, including lower interest rates, the recent tax cuts, the depreciation of the Australian dollar, ongoing spending on infrastructure, the stabilisation of the housing markets in some cities and a brighter outlook for the resources sector. It is reasonable to expect that, together, these factors will see growth in the Australian economy return to around its trend rate next year, although there are some obvious risks to this outlook.”
Those factors are similar to those he outlined in the August statement and in subsequent statements. But the big imponderable is whether household spending can rise, even though wages growth has slowed.
