In his first speech as Reserve Bank governor, Philip Lowe has hinted at a cautious approach to any further interest rate cuts.
While not closing off the option of further cuts from an already record low cash rate of 1.5 per cent, Dr Lowe emphasised that current low levels of inflation were not unprecedented in the period the RBA has been targeting 2-3 per cent annual consumer price increases.
“Since June 1993, CPI inflation has been below 2 per cent for 24 per cent of the time, and coincidentally above 3 per cent for 23 per cent of the time,” he observed in a speech at Citi’s investment conference.
“What is important is that we deliver an average rate of inflation consistent with the medium-term target.”
Contrary to some prominent economists and investors globally, Dr Lowe does not appear unduly concerned that inflation might be stuck at very low levels for an extremely long period.
“We expect that the various factors holding inflation down will continue for a while yet,” he said.
“But this does not mean that we have drifted into a world of permanently lower inflation in Australia.”
The new RBA governor said these factors include a fall in commodity prices (which he said appears to be near an end), low wage rises as workers accept that other prices are not rising quickly, reduced pricing power for businesses and workers due to global competition and spare capacity in the global economy due to the excesses before the financial crisis.
Dr Lowe views the last of those factors as the most long-term and structural one, due to changes in technology cutting production costs and facilitating ever more globalisation.
Jobs market OK, not great: housing cooler but still warm
The governor discussed at some length the other economic factors that would influence the decision of how quickly to pursue a return to target.
In particular, Dr Lowe said the bank was looking at financial stability — notably how fast housing prices and debt are rising — and the health of the labour market.
With the RBA acknowledging a recent uptick in the biggest housing markets of Sydney and Melbourne, financial stability argues against further rate cuts.
Dr Lowe suggested that the labour market was not as strong as it looks.
“Bank staff estimate that the current unemployment rate of 5.6 per cent is around ½ percentage point or a bit more above full employment. While this gap has narrowed over the past year, we do still have some spare capacity,” he observed.
“The unemployment rate has drifted down, but growth in hours worked is weak and many part-time workers would like to work longer hours.”
The RBA’s observation tallies with a report from JP Morgan economist Tom Kennedy, released yesterday, that pointed to record levels of underemployment.
However, even though Dr Lowe sees the jobs market as far from tight, it appears that it will take a worsening of conditions to force another rate cut.
“The case for moving more quickly would be strengthened in a world where the labour market was deteriorating and people were having increasing difficulty finding jobs,” he added.
ANZ economist Felicity Emmett argued that Dr Lowe’s speech clearly indicates that further rate cuts are still more likely than rate rises.
“With inflation set to stay low for an extended period, we believe the RBA holds an easing bias tempered by concerns over financial stability,” she wrote.
“Actual inflation and labour and housing market data are the key data to watch.”<br />
Recent housing market research by CoreLogic and global investment bank UBS has shown home prices rising to fresh records nationwide, while the latest employment numbers will be released by the ABS on Thursday and inflation figures next week on Wednesday.