In an address to the National Press Club of Australia, governor of the Reserve Bank of Australia (RBA) Phillip Lowe has acknowledged that the central bank’s next monetary policy adjustment could be a cut to the record-low cash rate of 1.5 per cent.
Mr Lowe said that given “uncertainties” regarding labour market conditions and the inflation rate, it is “possible that the economy is softer than we expect”.
Mr Lowe also noted the slowdown in the credit and housing space, with the latest CoreLogic data revealing that national home values dropped 5.6 per cent in the year to 31 January 2019, and the RBA’s own latest figures reporting that housing credit growth slowed by 1.6 per cent in the year to 31 December 2018, rising by 4.7 per cent compared to a 6.3 per cent increase in the previous 12 months.
Since the turn of the year, several lenders have also lifted rates out-of-cycle, including NAB and its subsidiary UBank, the Bank of Queensland (BOQ), Virgin Money, and ING. Lenders have attributed their decisions to the sustained rise in wholesale funding costs.
“Looking forward, there are scenarios where the next move in the cash rate is up and other scenarios where it is down,” Mr 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.”
Mr Lowe added: “In the event of a sustained increased in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point.
“We have the flexibility to do this if needed.”
The RBA’s concession follows calls from market analysts, including AMP Capital chief economist Shane Oliver, and managing director of Market Economics Stephen Koukoulas, for a near-term drop to the official cash rate.
However, the RBA has reiterated that it is in no rush to make a monetary policy adjustment.
“The board will continue to assess the outlook carefully,” Mr Lowe continued. “It does not see a strong case for a near-term change in the cash rate.
“We are in the position of being able to maintain the current policy setting while we assess the shifts in the global economy and the strength of household spending.”
The RBA governor added: “It has long been the board’s approach to avoid reacting to the high-frequency ebb and flow of news.
“Instead, we have sought to keep our eye on the medium term and put in place a setting of monetary policy that helps deliver on our objectives of full employment, an inflation rate that averages between 2 and 3 per cent, and financial stability.”
Mr Lowe’s remarks come after the RBA’s decision to hold the cash rate at 1.5 per cent, following its February board meeting.