Ahead of likely June rate cut, RBA urges Morrison to get economy moving

RBA to “consider the case” for June rate cut, as it urges action on tax cuts and spending.

Reserve Bank of Australia Governor Philip Lowe. Pic: AAP

The Reserve Bank will “consider the case” for cutting official interest rates to a new record low in the first week of June, as the central bank’s governor Philip Lowe calls for fast action on personal tax cuts, and pledges to pull out all stops to drive unemployment lower to stave off further weakness in the economy.

Speaking in Brisbane on Tuesday, Dr Lowe said cutting interest rates below the 1.5 per cent -- where the cash rate has been stuck since 2016 -- would help bring down the jobless rate and kickstart the rate of inflation, which stalled at zero per cent during the most recent March quarter.

But he also called on Prime Minister Scott Morrison to get moving on policies that will help boost economic growth in the face of faltering household spending, weak investment, and the sliding housing market.

In the event of a further deterioration in the unemployment rate, which unexpectedly jumped from its seven-year low of 4.9 per cent to 5.2 per cent in April, Dr Lowe said the government needed to consider “further monetary easing, additional fiscal support, including through spending on infrastructure, and structural policies that support firms expanding, investing and employing people”.

The RBA’s sole policy tool -- the cash rate -- is expected to be cut twice over the next six months, which will bring rates down to a new record low of 1 per cent.

“A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target. Given this assessment, at our meeting in two weeks’ time, we will consider the case for lower interest rates,” Dr Lowe said.

The RBA board meets on June 4, and financial markets are expecting a reduction in the cash rate at that meeting.

Although the central bank has targeted a 5 per cent unemployment rate, at which point most economists believe wages will grow strongly due to competition between companies for workers and drive a healthy inflation rate, there has been a shift in economic thought across the globe due to persistently weak inflation that has seen this revised, and that a lower jobless rate will be necessary not only for inflation, but which will not result in prices rising too quickly.

Dr Lowe said changes in technology and globalisation had suppressed wages growth in the face of lower unemployment.

“My judgment of the accumulating evidence is that the Australian economy can support an unemployment rate of below 5 per cent without raising inflation concerns,” Dr Lowe said.

In its most recent quarterly forecasts, the RBA triggered a downgrade to its household consumption growth forecasts, slashing its expectations from 2.75 per cent to just 2 per cent and labelling the figure — which accounts for 60 per cent of all domestic economic activity — as the “key source of uncertainty” for the local economy.

Dr Lowe said weak wages growth in recent years had made it harder for workers to pay down large mortgage debts and spend money to stimulate the economy.

While “stronger growth in income will help” restore consumer confidence, Dr Lowe said “the more important factor is some tax relief”.

“Over the past year, tax paid by households increased at a much faster rate than did income; almost 10 per cent, compared with 3.25 per cent – that is a big difference and it is unusual,” he said.

The Morrison government, which is to be returned to parliament with a majority in the lower house and a friendlier Senate, has pledged to legislate immediate tax relief for lower and middle income households.

There was speculation in other media outlets this morning that the tax cuts would not be passed on as the Prime Minister said parliament was unlikely to sit before June 30.

“Tax relief will be delivered in 2019-20 as promised,” a spokeswoman for the Prime Minister said.

“And will not be delayed by a year by the parliament not sitting in June as speculated in the media today.”

RBA minutes made clear it is poised to cut rates in June. Pic: AFP

Dr Lowe’s address came just hours after the release of the minutes of the RBA’s most recent meeting, in which the central bank cleared a path to an interest-rate cut in June.

A surprise decision by the Australian Prudential Regulation Authority on Tuesday to dump its 7 per cent interest rate buffer that borrowers were required to clear in order to gain approval for mortgages has also spurred expectations the RBA is gearing up the market to give a potential interest rate cut further fire power.

“The effect on the economy of lower interest rates could be expected to be smaller than in the past, given the high level of household debt and the adjustment that was occurring in housing markets,” the RBA minutes said. “Nevertheless, a lower level of interest rates could still be expected to support the economy through a depreciation of the exchange rate and by reducing required interest payments on borrowing, freeing up cash for other expenditure.”

As house prices continue to fall across the country, amid weaker than expected growth in lending across the economy, household consumption has come under severe pressure and has begun filtering through to lower rates of construction, retail sales and care sales. House prices are down almost 10 per cent across the country, with falls of more than 14 per cent in Sydney and 11 per cent in Melbourne. Both cities account for nearly half of the country’s housing stock.

According to the Australian Bureau of Statistics, total home loan demand slumped 3 per cent April, taking the year-on-year slide to 18 per cent.

Credit growth has now tumbled 26 per cent since late 2017 as banks tighten the screws on loan applicants and investors withdraw from the market.