Reserve Bank of Australia upbeat on economy, but keeps door open for more easing

Australia: The RBA has cut rates twice this year, most recently in August, taking the cash rate to a record-low 1.50 per cent.

By: Reuters | Sydney | Updated: September 22, 2016 9:02 am
australia, reserve bank of australia, rba, rba economy, australian dollar, dollar australia, australia central bank, australia economy, australia governor, australia business news, business news The Australian dollar extended gains on Lowe’s speech to hit an intra-day high of ##IMG-CONTENT##.7650, a level last seen on September 9 but soon pared gains to stand 0.1 per cent higher at ##IMG-CONTENT##.7629. (Source: File Photo)

The Reserve Bank of Australia governor Philip Lowe gave an upbeat assessment of the economy in his first public appearance on Thursday, but left the door ajar for more rate cuts as policy makers look to shore up record-low inflation and wages growth. Newly appointed Lowe, who was speaking before a parliamentary economics committee, however, emphasised the limits to monetary policy, saying it was “not particularly useful” to continue cutting rates in the hope that it will eventually lift growth.

The RBA has cut rates twice this year, most recently in August, taking the cash rate to a record-low 1.50 per cent. “Lowe’s most notable conclusion is that the commodity headwinds are easing,” Michael Blythe, chief economist at Commonwealth Bank, said.

“Some three-quarters of the decline in mining capex is in place and if recent increases in commodity prices are sustained the drag on incomes will come to an end.” Still, Lowe said it was “possible” that interest rates could fall further, depending upon inflation, the job market, housing and global factors . Futures market lowered expectations of another cut this year, implying a 24 per cent chance by Christmas from over 30 per cent earlier this week.

The Australian dollar extended gains on Lowe’s speech to hit an intra-day high of $0.7650, a level last seen on Sept.9 but soon pared gains to stand 0.1 per cent higher at $0.7629. The RBA hinted at a stable outlook for interest rates in minutes of its September meeting on Tuesday, after holding rates this month as the economy marked a quarter of a century without a recession.

“Our judgement is that (the) easing in monetary policy is supporting jobs and economic activity, and thus improving the prospects for sustainable growth and inflation outcomes consistent with the medium-term target,” Lowe told parliament on Thursday. The central bank chief appears before the committee twice a year to answer questions on the economy and monetary policy. A career central banker, Lowe has just taken over from Glenn Stevens who spent a decade in the top job.

Recent data showed gross domestic product (GDP) grew 3.3 per cent in the year to June, the fastest pace in four years. Yet employment still dipped in August and the swelling numbers looking to work longer hours pointed to plenty of spare capacity in the labour market.

Inflation is also running below the central bank’s 2-3 per cent target, with the consumer price index (CPI) falling in the March quarter for the first time since the 2008 global financial crisis. Retail sales have been anaemic and consumer confidence is falling. All of which could put the RBA in a tight spot and force more rate cuts.