Finance Finance News Low interest rates here to stay … and they could go even lower

Low interest rates here to stay … and they could go even lower

Philip Lowe stands in front a screen of financial data.
RBA governor Philip Lowe said low rates will be around for a while and may go even lower. Photo: The New Daily
Twitter Facebook Reddit Pinterest Email

Low interest rates could be around a while and may dip even lower, the Reserve Bank boss has said.

In an address in Sydney, RBA governor Philip Lowe tackled the question of Australia’s weak inflation and whether trying to achieve an inflation target was even still appropriate when most of the world was also grappling with ultra-low inflation.

Dr Lowe said despite two cuts of 25 points each, bringing the official cash rate to a historic low of 1 per cent, it was likely that low rates would persist for some time and that the RBA would cut again if it could not move inflation above its target rate of 2 to 3 per cent.

(The annual inflation rate in Australia fell to just 1.3 per cent in the first quarter of 2019, and for the past three years it has undershot the RBA’s 2-3 per cent target.)

“These two recent reductions in the cash rate will support demand in the Australian economy,” he said.

“So too will recent tax cuts, higher commodity prices, some stabilisation in the housing market, ongoing investment in infrastructure and a lift in resource sector investment. We also need to remember that the underlying foundations of the Australian economy remain strong.”

Dr Lowe said if those cuts did not fuel enough demand in the economy and wages growth to lift inflation, it would be forced to cut again.

“It remains to be seen if future growth in demand will be sufficient to … lift inflation in a reasonable timeframe. It is certainly possible that this is the outcome.

“But if demand growth is not sufficient, the board is prepared to provide additional support by easing monetary policy further.”

Even if the RBA did not cut again, Dr Lowe said he was fully expecting  that the journey to get inflation moving again would be a long one.

“Whether or not further monetary easing is needed, it is reasonable to expect an extended period of low interest rates. On current projections, it will be some time before inflation is comfortably back within the target range.”

While most economists have predicted the RBA to cut by a further 25 basis points before the end of the year, some others believe the bank will go even further, with another cut in early 2020, sinking the cash rate to 0.50 per cent.

Westpac chief economist Bill Evans on Wednesday became the first of the economists at the four big banks to revise his outlook for the cash rate, down from 0.75 per cent to 0.50 per cent, predicting cuts in October and February 2020.

But chief economist at CommSec Craig James said anyone looking for another “quick follow-up rate cut” might be disappointed.

“The Reserve Bank governor now wants to sit back and see how the situation evolves. But clearly additional rate stimulus is possible if required,” Mr James said.

In the face of low inflation here and globally, Mr Lowe rejected any suggestion of “shifting the goalposts” on inflation simply to meet the target as it risked making low inflation the status quo.

“Lowering the target might have the short-run advantage of allowing us to say we have achieved our goal, but shifting the goalposts hardly seems a good way to build long-term credibility,” Dr Lowe said.

“Shifting the goal posts could also entrench a low inflation mindset.”

“The Board is strongly committed to making sure we get there and continuing to deliver an average rate of inflation of between 2 and 3 per cent.

“It is highly unlikely that we will be contemplating higher interest rates until we are confident that inflation will return to around the midpoint of the target range.”

Dr Lowe’s strong message on inflation came as The Australian Financial Review quoted Treasurer Josh Frydenberg as saying he is taking advice from his department about the parameters for central bank policy regarding inflation.

Dr Lowe concluded by repeating his call on governments to help boost inflation through fiscal policy.

“As I have discussed on other occasions, other arms of public policy could also play a role in this scenario.”

View Comments