Australia economy seen turning up, rate cuts still on table

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SYDNEY (Reuters) – Australia’s economy may have reached a “gentle turning point,” led by a tentative pick-up in home prices, tax cuts and a weaker Aussie dollar, the country’s central bank chief said on Friday, though more interest rate cuts were still on the table. The Reserve Bank of Australia (RBA) has reduced interest rates twice since June to 1%, an all-time trough, and committed to keeping rates low for an “extended period” as it doubts inflation would hit its target anytime soon.

On Friday, the RBA trimmed its forecast for growth, inflation and unemployment despite assuming two more rate cuts to 0.5%.

“The downward revision this year mainly reflects weak consumption growth,” Governor Philip Lowe told a parliamentary economics committee in Canberra.

“Even so, looking ahead, there are signs the economy may have reached a gentle turning point,” he added.

“Consistent with this, we are expecting the quarterly growth outcomes to strengthen gradually after a run of disappointing numbers.”

However, the RBA’s quarterly statement of monetary policy, also released on Friday, was less upbeat.

Its revised forecasts assumed underlying inflation would not reach the floor of its 2-3% target band until mid-2021, a year later than previously expected. Unemployment was seen at 5.0-5.25% all the way to the end of 2021, well above the RBA’s recently-adopted goal of 4.5%.

“Today’s forecasts from the RBA show that even with a cash rate of 0.5%, the unemployment rate will only get down to 5% so more stimulus, monetary or fiscal or both, will be necessary eventually,” said AMP Capital Senior Economist Diana Mousina.

The Australian dollar, which has fallen 3.5% this year, eased a tad to $0.6807 after the RBA downgraded forecasts, but was still far from a recent decade-low of $0.6677.

Futures are fully pricing in one 25 basis point cut in October and a follow-on move to 0.5% early next year.

UNCONVENTIONAL TIMES

Lowe laid out the possibility of zero interest rates in Australia if global policy headed there and the domestic economy weakened materially.

However, he showed no rush to go down that path, saying the central bank’s board was prepared to ease further if there was “additional accumulation of evidence” that more cuts were needed.

 “It’s possible we end up at the zero lower bound. I think it’s unlikely but it is possible,” Lowe said, responding to questions in his semi-annual testimony.

He added that the RBA was examining “in great detail” the experience of policies used by other central banks such as negative rates, explicit forward guidance, creating credit, expanding balance sheets and currency intervention.

“We are prepared to do unconventional things if circumstances warranted. I hope we can avoid that.”

In contrast, Reserve Bank of New Zealand Governor Adrian Orr this week flagged the possibility of negative interest rates as a means of stimulating the economy.

Markets expect that global central bank stimulus, including New Zealand’s larger-than-expected 50 basis point cut on Wednesday, to compel the RBA to cut again before year-end.

Lowe conceded it would be difficult to escape the fact that if global rates were low, they would be low in Australia too.

This is a major reason Lowe has emphasised that monetary policy alone could not achieve its goals, and has repeatedly urged the government to increase spending.

“Monetary policy certainly can help, and it is helping, but there are certain downsides from relying too much on monetary policy,” he said.

 “One option is for fiscal support, including through spending on infrastructure,” he added. “There is no shortage of finance to do this.”

He also cited a need for structural reforms to boost business investment and innovation.

Some economists said the RBA’s assessment that the worst of the downturn in Australia’s economy has now passed was simply too optimistic.

“We think the RBA is still underestimating the impact to Australia from the weakness in the global economy,” AMP’s Mousina said, referring to an ongoing Sino-U.S. trade war. “Global manufacturing conditions are at recession-like levels.”

Reporting by Swati Pandey and Wayne Cole in SYDNEY; Editing by Richard Borsuk

Our Standards:The Thomson Reuters Trust Principles.

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