Interest rate cuts as likely as rises as Reserve Bank governor eyes falling house prices

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February 06, 2019 12:31:01

The Reserve Bank governor says the chance of an interest rate cut is now “more evenly balanced” with the prospect of an increase as the RBA assesses the fallout from Sydney and Melbourne house price falls.

In a speech to reporters at the National Press Club in Sydney, RBA governor Philip Lowe noted there were many more risks to both the global and Australian economic outlook.

This has prompted the RBA to tweak its outlook for interest rates, which have been on hold at a record low of 1.5 per cent for 27 consecutive Reserve Bank board meetings.

“Looking forward, there are scenarios where the next move in the cash rate is up and other scenarios where it is down,” Dr Lowe said.

“Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced.”

The change in attitude towards interest rates comes amid a steady flow of disappointing economic data over recent months, which has prompted the Reserve Bank to slightly lower its forecast for Australia’s economic growth to 3 per cent this year and 2.75 per cent in 2020.

That is despite Dr Lowe saying he expected a rebound from particularly weak GDP numbers in the September quarter when the December figures come out.

“This type of growth should be sufficient to see further gradual progress in lowering unemployment,” he added.

Dr Lowe said there were a number of factors supporting Australia’s economy, but house price falls and weaker consumer spending were the main domestic economic risk.

“The Australian economy is benefiting from strong growth in infrastructure investment and an upswing in other areas of investment. The labour market is also strong, with many people finding jobs,” he noted.

“This year, we will also benefit from a further boost to liquefied natural gas (LNG) exports. The lower exchange rate and a lift in some commodity prices are also assisting.

“Against this generally positive picture, the major domestic uncertainty is the strength of consumption and the housing market.”

RBA counts on rising wages to offset falling house prices

However, Dr Lowe put a positive spin on house price declines, noting they were improving affordability for prospective first home buyers.

“We have moved almost seamlessly from worrying that prices were going up, to worrying that they are going down,” he argued.

“The previous trends in debt and housing prices were becoming unsustainable and some correction was appropriate.

“We recognise that this correction will have an effect on parts of the economy. But our economy should be able to handle this, and it will put the housing market on a more sustainable footing.”

The Reserve Bank is pinning its hopes on continued strength in the jobs market to lead to bigger pay increases that would help underwrite consumer spending.

“Through our discussions with business we are also hearing more reports of firms finding it difficult to find workers with the necessary skills. In time, this should lead to larger wage rises. This would be a positive development,” he said.

“Over the next year, we are expecting a pick up in household disposable income to provide a counterweight to the wealth effects of lower housing prices.”

Dr Lowe also welcomed the banking royal commission report, noting it should end some of the uncertainty that had seen some banks become conservative in granting loan approvals.

“The commission’s recommendations that bear on credit provision are balanced and sensible, and should remove some uncertainty,” Dr Lowe observed.

Topics:

money-and-monetary-policy,

economic-trends,

banking,

australia



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