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RBA Ready to Ease Again, But Lowe Sees `Gentle Turn' in Economy


By Michael Heath


Reserve Bank Governor Philip Lowe said he’s prepared to reduce Australia’s record-low interest rates further, though he signaled that the economy could in fact be through the worst of its slowdown.

“There are signs the economy may have reached a gentle turning point,” Lowe said in a prepared statement to a parliamentary panel in Canberra Friday. “Consistent with this, we are expecting the quarterly GDP growth outcomes to strengthen gradually after a run of disappointing numbers.”

The RBA undertook back-to-back rate cuts in June and July to a record-low 1% as it sought to revive a decelerating expansion and drive down unemployment. It joined developed-world counterparts in easing as the U.S.-China economic confrontation deepens, damping global confidence and investment.

“While we might wish it were otherwise, it is difficult to escape the fact that if global interest rates are low, they are going to be low here in Australia too,” Lowe said in his semi-annual testimony. “Our floating exchange rate gives us the ability to set our own interest rates from a cyclical perspective, but it does not insulate us from long-lasting shifts in global interest rates driven by saving/investment decisions around the world.”

The Aussie dollar has declined almost 8% in the past 12 months as the economy slowed and money markets boosted bets the RBA would resume easing. The currency climbed Friday morning in Sydney as markets read into the remarks that the governor was gaining confidence that growth could be turning up.

Lowe said it was prudent to be thinking about unconventional policies, though he reiterated that he believed this was unlikely in Australia.

Glass Half Full

Lowe’s gentle optimism is based on the RBA’s lower rates, recent tax cuts, a lower currency, a brighter outlook for investment in the resources sector, some stabilization of the housing market and ongoing investment in infrastructure.

“It is reasonable to expect that, together, these factors will see growth in the Australian economy return to around its trend rate next year,” he said. The economy’s speed limit is estimated at about 2.75%. Still, even an improving outlook won’t resolve the economy’s underlying challenges.

“In the central scenario that I have sketched today, inflation will be below the target band for some time to come and the unemployment rate will remain above the level we estimate to be consistent with full employment,” Lowe said. “While this remains the case, the possibility of lower interest rates will remain on the table.”

The governor also highlighted the elephant in the room: the political and economic uncertainty worldwide.

“These disputes pose a significant risk to the global economy,” Lowe said. “Not only are they disrupting trade flows, but they are also generating considerable uncertainty for many businesses around the world. Worryingly, this uncertainty is leading to investment plans being postponed or reconsidered.”

(Updates with responses to lawmakers’ questions from sixth paragraph.)


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