RBA puts rate cut back on table, hails ‘balanced and sensible’ royal commission report

The dollar has dived after the RBA governor said the outlook for interest rates has become “more evenly balanced”.

Governor of the Reserve Bank of Australia Philip Lowe. Kym Smith/The Australian

The Australian dollar had dived after Reserve Bank of Australia governor Philip Lowe said the outlook for interest rates has become “more evenly balanced”, adding there is a risk the economy might be weaker than the central bank thinks.

Dr Lowe also said the housing market was undergoing a “correction” as prices fall across major capital cities, but said the economy was well placed to handle the falls.

“It is not expected to derail economic growth,” Dr Lowe said of the housing price drop.

The comments were made in a wide ranging speech given to the National Press Club in Sydney. The speech marks the first major public comments by the central bank boss this year.

The Australian dollar dived against the greenback on the release of the speech, tumbling from around US72.40 cents to US71.74c.

“Looking forward, there are scenarios where the next move in the cash rate is up and other scenarios where it is down,” Dr Lowe said in a speech.

“Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced,” he added.

The comments represent a significant shift for the central bank, which has held interest rates steady since mid-2016, and has pointed to the likelihood that a tightening job market will lift wages and inflation over time.

The RBA left its benchmark cash rate on hold at 1.5 per cent on Tuesday after its first policy meeting since December.

The period through Australia’s summer has brought news of a collapse in business conditions, falling house prices, crumbling new house price permits, weak retail sales and a drop in job advertisements.

On housing, Dr Lowe said the double-digit percentage falls in prices across Sydney and Melbourne was the economy undergoing an adjustment.

This had come about from a downturn in demand from overseas investors; building boom catching up to population growth; demand tailing off for high prices and some tightening of bank lending standards.

“At this point, though, what we are seeing looks to be a manageable adjustment in the housing market. It is not expected to derail economic growth,” Dr Lowe said.

“The previous trends in debt and housing prices were becoming unsustainable and some correction was appropriate. We recognise that this correction will have an effect on parts of the economy. But our economy should be able to handle this, and it will put the housing market on a more sustainable footing,” he said.

Dr Lowe said the outlook for interest rates rest a lot on conditions in the job market, which have been stellar over recent years.

Australia’s unemployment is at 5.0 per cent, its lowest levels in around 6 years.

“We will be monitoring developments in the labour market closely. If Australians are finding jobs and their wages are rising more quickly, it is reasonable to expect that inflation will rise and that it will be appropriate to lift the cash rate at some point,” Dr Lowe said.

On the other hand, given the uncertainties, “it is possible that the economy is softer than we expect”, and that income and consumption growth disappoint.

In the event of a sustained increased in the unemployment rate and a lack of further progress towards the inflation objective, “lower interest rates might be appropriate at some point,” he added.

“We have the flexibility to do this if needed,” Dr Lowe said.

The RBA does not see a strong case for a near-term change in the cash rate.

“We are in the position of being able to maintain the current policy setting while we assess the shifts in the global economy and the strength of household spending,” he added.

Reserve Bank governor Philip Lowe also declared Royal Commissioner Kenneth Hayne’s will return “some” certainty to the credit market while lauding the Former High Court Justice’s attempt to tackle the financial sector’s focus on sales culture, rather than service.

It came as the central bank boss cut the official forecasts for Australian economic growth amid falling estimates for household consumption and a weaker residential construction outlook.

The RBA’s central forecast for the local economy is to now expand by 3 per cent this year and 2.75 per cent in 2020. “These forecasts are lower than the ones we published three months ago,” Mr Lowe told an audience in Sydney. He said the RBA board “does not see a strong case for a near-term change in the cash rate” as it waits an assesses “the shifts in the global economy and the strength of household spending”.

Following the publication of Mr Hayne’s final report, banks stocks have surged on the prospect of a reigniting in credit growth, which had become constrained as lenders tightened lending criteria after being shamed at the royal commission.

“Over recent years there has been a needed tightening of credit standards. But the right balance needs to be struck. As lenders have sought to find that balance, we have had some concerns that the pendulum may have swung too far the other way, especially for small

business,” Mr Lowe said.

“In that context, I welcome the report of the Royal Commission and the Government’s response. The Commission’s recommendations that bear on credit provision are balanced and sensible, and should remove some uncertainty. I also welcome the Commission’s focus on: the importance of service — as opposed to sales — in the financial sector; the necessity of dealing properly with conflict of interest issues; and the importance of accountability when things go wrong,” he said.

“Addressing them is central to rebuilding the all-important trust in our financial system.”

Mr Lowe said although the global economy was continuing to track in a “reasonable” direction, there has been an “accumulation of downside risks” over the latter half of last year.

“Many of these risks are related to political developments: the trade tensions between the United States and China; the Brexit issue; the rise of populism globally; and the reduced support from the United States for the liberal order that has supported the international

system and contributed to a broad-based rise in living standards,” he said.

Mr Lowe said Chinese authorities reining in the shadow banking market could lead to some adjustments. “For Australia, what happens in China is especially important. Growth there has slowed,” he said. “The slowing is probably faster than the government had hoped for, with the

economy feeling the effects of the trade dispute with the United States and the squeezing of finance to the private sector.”

While there was an upswing in local infrastructure investments and the local labour market was strong, Mr Lowe said “the major domestic uncertainty is the strength of consumption and the housing market.”

Official figures out yesterday showed unexpectedly soft retail figures, and many analysts have raised concerns falling house prices in Sydney and Melbourne are scaring consumers into shutting their wallets.

Mr Lowe said there were four main reasons for falling house prices in Sydney and Melbourne: housing prices went to high making property an unattractive investment, increased supply of apartments, falling Chinese demand for homes, and tightened lending standards. He said it was important to remember falling house prices currently were not associated with a rising jobless rate or interest rates. Mr Lowe also said consumers were not as likely as many thought to instantly shut their wallets amid falling house prices.

“What we are seeing looks to be a manageable adjustment in the housing market. It is not expected to derail economic growth. The previous trends in debt and housing prices were becoming unsustainable and some correction was appropriate,” Mr Lowe said.

“Even after the recent declines in Sydney, prices are still 75 per cent higher over the decade. In Melbourne, they are 70 per cent higher,” he said.

But the RBA governor said there were some flow on effects from the weakening in the housing market, but that this needed to be held in context of the previous boom.

“Putting all this together, our economy is going through an adjustment following the turn in the housing markets in our largest cities. It is important that we keep this in perspective though,” Mr Lowe said.

David Rogers also contributed to this report