Australian dollar falls as governor Philip Lowe says ‘reasonable to expect an extended period of low rates’

This article is more than 1 year old

This article is more than 1 year old

The Australian dollar has fallen sharply after the Reserve Bank governor, Philip Lowe, said the central bank could keep cutting the cash rate in the coming months to support the ailing economy.

After two successive reductions in the rate in June and July left it at an unprecedented 1%, Lowe said in Sydney on Thursday that borrowing costs were likely to remain low for some time.

“Whether or not further monetary easing is needed, it is reasonable to expect an extended period of low interest rates,” Lowe said.

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His comments will harden the resolve of forecasters who have predicted that the bank will continue to cut the cash rate. While another cut at the bank’s board meeting on 6 August seems unlikely, most experts believe the rate will reach 0.5% by early 2020 with one cut in the spring and another in the new year.

The respected Westpac economist Bill Evans, for example, this week brought forward his predicted timetable for the cuts to October and February as economic indicators continued to point to weak growth and stagnant wages.

The Australian dollar dipped on Lowe’s comments, from US69.80c to US69.65c before settling a fraction higher in the late afternoon.

The direction of travel for rates was further confirmed after Lowe dismissed calls for the bank to set its controversial inflation target lower than the current target band of between 2% and 3%.

A lower inflation target could ease pressure on the RBA to cut the cash rate further because lower borrowing costs are seen as a key tool to drive prices higher. Economists like to see price growth around the “Goldilocks” level of 2-3%. Anything lower brings the spectre of deflation, which has undermined the Japanese economy for 20 years.

But while moving away from its reliance on lower rates would please savers hit hard by the low term deposit rates, Lowe said he was sticking to his much-criticised policy.

He said “shifting the goalposts” on inflation could damage Australia’s economic credibility, normalise low price growth and have only short-term advantages.

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Lowe said Australia had avoided fetishising inflation to the point of becoming “inflation nutters” and had averaged 2.4 per cent price growth over nearly three decades – very close to the midpoint of its mandated target.

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

Stephen Koukoulas (@TheKouk) Just read the Lowe speech - OMFG: Read it on context of RBA missing the inflation target for more than 5 years; high labour underutlisisaton with wages growth comatose & stagnant per capita GDP https://t.co/7XX8njEs5t

Lowe’s comments came amid reports that the treasurer, Josh Frydenberg, was seeking to change the parameters for central bank policy regarding inflation, and there had been conjecture on whether the governor would defend the status quo or flag changes.

“Governor Lowe has opted for the former,” CommSec chief economist Craig James said. “We believe that was never in doubt given the weight of comments from Reserve Bank officials over time, but it is important that any uncertainties have been cleared up.”

David Bassanese, chief economist at BetaShares in Sydney, said that the governor had mounted a strong defence of the current policy but questioned the wisdom of the ultra-loose monetary policy strategy in the longer term.

“In their vain pursuit of higher inflation, central banks risk keeping monetary conditions unduly loose for too long, and thereby risk building up financial market imbalances – particularly over-inflated house and equity prices. These risks seem to have been downplayed by the governor, especially given signs that the Sydney property market is hotting up again.

“To my mind the global economy is benefiting from positive supply shocks – such as rising labour force participation among older workers, globalisation and new technologies – which is boosting both economic and holding down inflation. Central banks continue to downplay these positive supply side effects on inflation, or at least assume they will prove more temporary than currently seems the case.”

