RBA’s Lowe Says Rising Unemployment Would Trigger a Rate Cut

Michael Heath and Jason Scott
RBA’s Lowe Says Rising Unemployment Would Trigger a Rate Cut

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Australia’s central bank chief Philip Lowe signaled his board is on hold, saying further cuts to an already record-low interest rate risked doing more damage to the economy than the short-term benefit it would create.

“At the moment, the risks have slightly tilted to outweigh the benefits,” the governor told a parliamentary panel in Canberra Friday. “But, that could turn, particularly if the unemployment rate deteriorates.”

Lowe warned of “significant areas of uncertainty” such as the outbreak of coronavirus in China -- Australia’s key trading partner -- and said signs of weaker hiring and inflation would swing the balance back toward rate cuts.

The Reserve Bank, in its quarterly update of economic forecasts also released Friday, predicted the jobs market would regain strength and unemployment fall to 4.75% next year. It predicts that after a near-term hit from the bushfires, as well as the virus, economic growth will accelerate.

Traders aren’t so sure: they’re pricing in just under a 50% chance of the RBA easing in June, with wagers rising into the high 60s by the end of the year.

The RBA kept the cash rate unchanged this week at a record low 0.75% as the labor market holds up and amid resurgent property prices. Lowe cut rates three times last year to boost economic growth and is reluctant to ease further as he fears unleashing a renewed borrowing binge.

The RBA’s economic growth outlook, outlined in its Statement on Monetary Policy, envisages an upswing in household spending that has been in the doldrums for an extended period. It sees consumption growth accelerating to 2% at the end of this year from around 1% in the middle of the year and then climbing to around 2.5% by the end of 2021.

The forecast reflects the “ongoing improvement in housing market activity and moderate growth in household income,” the RBA said, acknowledging that household spending remains an “important source of uncertainty for the domestic growth forecasts.”

The central bank’s estimates are based on market pricing for another rate cut around mid year.

To date, households have used the RBA’s rate cuts to pay down their mortgages faster and have saved government tax rebates. Lowe maintains that this is a normal response and suggests that once Australians have consolidated their financial position, they will resume spending. Household debt has indeed fallen recently from a record high.

The bank’s unemployment outlook is premised on the participation rate holding steady, implying an end to the swelling labor force that absorbed the waves of elevated hiring over the past three years.

But even then, the jobless rate is short of estimated full employment at 4.5%, and the bank forecasts little change in wages growth from its current pace. That results in inflation only forecast to reach the bottom of the central bank’s 2%-3% target at the end of next year.

All this comes against the backdrop of a disastrous summer of drought and wildfires that have smashed tourism and consumption as land and wildlife were incinerated and cities inundated with acrid smoke.

Compounding this is coronavirus. Australia’s economic fortunes are heavily dependent on the world’s number 2 economy: China buys one-third of Australian goods and services. Halting flights to limit the spread of the virus will strike at the heart of education and tourism, some of the nation’s most valuable exports. A weaker Chinese economy also has less need for iron ore, and the price is tumbling accordingly.

“The outbreak of the coronavirus represents a new source of uncertainty,” Lowe told lawmakers Friday, adding “much will depend on the success of the various efforts to control the virus.”

Under questioning, he said the virus posed a greater threat to the Australian economy than the SARS virus almost two decades ago, with reports of disruption to trading supply chains and the tourism industry.

The governor also used his semi-annual testimony to reiterate his views on the possibility of quantitative easing:

Negative interest rates in Australia are extraordinarily unlikelyThere is no need for special liquidity operations as the nation’s financial markets are operating normallyThe threshold for undertaking QE (the RBA purchasing assets through balance sheet expansion) has not been reached and isn’t expected to be reachedRBA will consider QE only if there’s evidence that medium-term objectives of full employment and inflation are unlikely to be reached and if the cash rate had been reduced to 0.25%The RBA has no appetite to purchase private sector assets as part of any QE program

To contact the reporters on this story: Michael Heath in Sydney at mheath1@bloomberg.net;Jason Scott in Canberra at jscott14@bloomberg.net

To contact the editors responsible for this story: Paul Jackson at pjackson53@bloomberg.net, Alexandra Veroude, Malcolm Scott

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