In his address to the Economic Society of Australia, governor of the Reserve Bank of Australia (RBA) Phillip Lowe revealed that the central bank’s board would “consider the case” for a cut to the official cash rate in June.
Mr Lowe’s address coincided with the releases of minutes from the RBA’s monetary policy board meeting in May, in which it held the official cash rate at 1.5 per cent.
However, with inflation and labour market indicators continuing to fall below target, Mr Lowe said that monetary policy “has a role to play” in reversing the subdued market conditions.
“At that meeting, we discussed a scenario in which there was no further improvement in the labour market and the unemployment rate remained around the 5 per cent mark,” he said.
“In this scenario, we judged that inflation was likely to remain low relative to the target and that a decrease in the cash rate would likely be appropriate.
“A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target.”
He added: “Given this assessment, at our meeting in two weeks’ time, we will consider the case for lower interest rates.”
The shift in the RBA’s outlook confirms market expectations of a rate cut in June, with some analysts, including AMP chief economist Shane Oliver, stating that the RBA may well have dropped the cash rate in May had it not been for the domestic political environment – which has now been settled by the Coalition government’s electoral victory.
Mr Lowe’s remarks have also coincided with the Australian Prudential Regulation Authority’s (APRA) proposal to remove the 7 per cent interest rate floor for mortgage serviceability assessments and increase the interest rate buffer from 2 per cent to 2.5 per cent.
APRA chair Wayne Byres noted that its proposal to loosen its regulatory framework reflected changes in the operating environment, particularly stating that it expects interest rates to “remain historically low for some time”.
“APRA introduced this guidance as part of a suite of measures designed to reinforce sound residential lending standards at a time of heightened risk,” he said. “Although many of those risk factors remain – high house prices, low interest rates, high household debt, and subdued income growth – two more recent developments have led us to review the appropriateness of the interest rate floor.”
He added: “With interest rates at record lows, and likely to remain at historically low levels for some time, the gap between the 7 per cent floor and actual rates paid has become quite wide in some cases – possibly unnecessarily so.
“In addition, the introduction of differential pricing in recent years – with a substantial gap emerging between interest rates for owner-occupiers with principal-and-interest loans on the one hand and investors with interest-only loans on the other – has meant that the merits of a single floor rate across all products have been substantially reduced.”