Matthew Cranston | The Australian Financial Review | 21 May 2019
Reserve Bank of Australia governor Philip Lowe has given his clearest signal yet that interest rates will be cut next month, suggesting that a recent rise in the unemployment rate was enough to prevent inflation targets from being met.
“A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target,” Dr Lowe told the Economic Society of Australia in Brisbane on Tuesday.
“Given this assessment, at our meeting in two weeks’ time, we will consider the case for lower interest rates,” Dr Lowe said.
Dr Lowe said that if the unemployment rate did not move lower with current policy settings, there were options.
“These include: further monetary easing; additional fiscal support, including through spending on infrastructure; and structural policies that support firms expanding, investing and employing people.”
However he said relying on just one type of policy had “limitations” and has hedged his bets by suggesting the current record low official cash rate of 1.5 per cent was still enough to see employment figures improve.
“It is possible that the current policy settings are sufficient to deliver lower unemployment,” Dr Lowe said.
Employment improvement ‘less likely’
“The labour market has surprised on the upside over recent times, and it could do so again. While we can’t rule out this possibility, the recent flow of data makes it seem less likely.”
The jobless rate has risen to 5.2 per cent last week, but employment was also stronger with 28,400 new jobs created in the month of April – almost double the number economists were expecting, creating a dilemma for the RBA on how best to interpret such employment data.
Inflation has also shown weaker readings and Dr Lowe said the March quarter was “noticeably lower than we had expected”.
The key annual core measure watched by the RBA – the trimmed mean inflation – came in at 0.3 for the quarter pushing the annual rate down to 1.6 per cent, much lower than the bank’s forecast of 1.8 per cent.
Experience a ‘little unusual’
Dr Lowe said that in most cases, when employment growth was stronger than expected, “we expect to see an upside, not a downside, surprise on inflation.”
“So, from this perspective, the recent experience is a little unusual.”
He said the board had been repeatedly asking itself what rate of unemployment was achievable in Australia without generating inflation concerns?
Dr Lowe said the economy could support an unemployment rate of below 5 per cent “without raising inflation concerns.”
However, there are indications that jobs growth is starting to weaken, with the NAB business survey recording the first below average employment figures since 2016.
A record participation rate also drove the higher unemployment rate, with more people entering the workforce, particularly women.
In RBA board meeting minutes released on Tuesday, the board noted that members had “considered the scenario where there was no further improvement in the labour market in the period ahead, recognising that in those circumstances a decrease in the cash rate would likely be appropriate.”
Global trade key risk for business investment
Dr Lowe said while a slowdown in China was a concern the biggest risk was trade and the uncertainties that had created for business investment decisions.
“The big uncertainty remains trade policy. A resolution of the current disputes would help boost trade flows and reduce some of the uncertainties facing businesses,” he said.
“In the face of increased uncertainty about future trade policy, many businesses have preferred to wait for a clearer picture.”