In an address to Citi’s Australia and New Zealand Investment Conference, Reserve Bank governor Philip Lowe has acknowledged the benefits of further cuts to the cash rate as a means to reducing stability risks and supporting the economic recovery.
Governor Lowe said the RBA had not been convinced that further cuts would deliver “better economic outcomes”, but now conceded they may have a role to play in supporting fiscal stimulus provided by the federal government.
“When the pandemic was at its worst and there were severe restrictions on activity, we judged that there was little to be gained from further monetary easing,” he said.
“The solutions to the problems the country faced lay elsewhere.
“As the economy opens up, though, it is reasonable to expect that further monetary easing would get more traction than was the case earlier.”
The central bank governor said further monetary policy adjustments may help stimulate the labour market by supporting private sector balance sheets and lessening the number of “problem loans”.
Governor Lowe also pointed to changes in global market conditions, which have influenced Australia’s exchange rate and yield curve.
“In the past, the interest differentials provided a reasonable gauge to the relative stance of monetary policy across countries,” he said.
“Today, things are not so straightforward, with monetary policy also working through balance sheet expansion. “
He continued: “[Our] balance sheet has increased considerably since March, but larger increases have occurred in other countries.
“We are considering the implications of this as we work through our own options.”
However, governor Lowe stressed that adjustments would need to be weighed against any potential risks that rate cuts may incur, including lower savings rates and an increased appetite for riskier forms of investment.
“These are [the] complex issues we have been considering at our recent board meetings. The board will continue to review these and other issues at our upcoming meetings,” he said.
“We are committed to do what we reasonably can, with the tools we have, to support the recovery of the Australian economy.”
Both Westpac chief economist Bill Evans and NAB Group Economics have forecast a 10 bps cut to the cash rate next month, aimed at supplementing stimulus announced in the federal budget.
[Related: RBA reveals cash rate decision for October]