Rate cuts are losing impact: RBA

Reserve Bank governor Philip Lowe warns that monetary policy risks becoming ‘overburdened’

RBA Governor Philip Lowe says the economy is ‘gradually improving’. Picture: AAP

The US-China trade war has worsened a slowdown in Australia’s biggest trading partner as Reserve Bank governor Philip Lowe warned that monetary policy risks becoming “overburdened” unless such geopolitical risks are resolved.

China’s economic growth rate skidded to a three-decade low of 6 per cent year-on-year in the September quarter, from 6.2 per cent in the June quarter, undershooting economist’s expectations of 6.1 per cent growth. It was the weakest economic growth in China in records going back to 1992.

With growth for the 2019 year-to-date slowing to 6.2 per cent, economists said the further loss of momentum in the September quarter as the latest US tariff hikes took effect suggested China’s full-year growth will be near the low end of the 6 to 6.5 per cent target band set by Beijing in March.

“Given the larger than expected slowdown in growth in the September quarter, we are revising our near term forecasts lower,” said NAB senior economist Gerard Burg said yesterday.

With sales of iron ore, coal, LNG and more recently education, China ranks as Australia’s largest trading partner.

In June, sales to China made up 40 per cent of all Australian exports.

The slowdown comes at a fragile time for Australia with the International Monetary Fund this week slashing its forecasts for local economic growth.

The IMF cut its growth forecast for the Australian economy from 2.1 per cent to 1.7 per cent — a level below the government’s and the Reserve Bank’s forecasts of about 2.25 per cent.

Mr Burg said the slowdown in China was driven by manufacturing and construction, with conditions in the former “significantly weaker as a result of the US-China trade war”.

As part of the latest truce in its 18-month trade war with China, the US has indefinitely delayed a tariff hike on $US250bn ($368bn) of Chinese goods that was due take effect this week, but another tariff hike on other Chinese goods is still due in December and existing tariffs still stand.

NAB now expects China to record 6.1 per cent growth for 2019 from 6.25 per cent previously, while growth in 2020 is now forecast to be 5.9 per cent compared with 6 per cent previously.

The figures came as Dr Lowe warned that such global geopolitical uncertainties, together with slower population growth and weak productivity growth in advanced economies, were causing an “elevated appetite to save relative to the appetite to invest in new productive capital”.

Speaking at the IMF in Washington early on Friday, Dr Lowe said those forces were pushing interest rates lower globally.

However, without structural reforms by the government and a lessening of geopolitical uncertainty further interest rate cuts by the RBA won’t help much.

At the same time, Dr Lowe said negative interest rates were unlikely to emerge in Australia even while economists argue the door remains open for cash rates to fall again to a fresh record low from the current level of 0.75 per cent.

Asked about the topic of unconventional monetary policy, Dr Lowe said: “I’m not going to speculate on negative interest rates and quantitative easing in Australia, other than to say negative interest rates are extraordinarily unlikely in my country.”

He said the key to a return to more normal interest rates globally was to improve the investment climate, so that firms wanted to use the pool of new savings to invest in new capital.

“In principle, improving the investment climate could be done through two channels,” Dr Lowe said.

“The first is resolving some of the global geopolitical uncertainties — I think that would reduce the risk premiums required on new capital investment — and the second channel is through structural reforms that give businesses the confidence to invest, expand, innovate and hire people.”

But he cautioned that “both these channels are beyond the control of central banks”.

“In the event that we don’t see movement on these two channels, I see a serious risk that monetary policy will become overburdened,” Dr Lowe said.

“If firms don’t want to invest at the lowest interest rates on record, reducing interest rates a bit more probably isn’t going to shift the dial that much.”

Dr Lowe appeared to talk down the prospects of further interest rate cuts, saying the economy was set to return to “trend” growth” next year, lowering unemployment and lifting wages.

While it was possible more cuts were needed “I wouldn’t assume it”, he said.

“I don’t think it’s the right assumption to make that we’re going to have a lot more work to do to get inflation back to target and growth back to trend,” Dr Lowe added.

“It’s quite probable that we’ll see a return to trend growth over the next year, which will help get the unemployment rate down and gradually wages will pick up.”

Markets continued to dial back speculation of further rate cuts after jobs data on Thursday showed the unemployment rate for September unexpectedly fell to 5.2 per cent from 5.3 per cent in August.

The market-implied chance of a November cut fell to 19 per cent from 41 per cent on Wednesday.

But the market was still fully expecting a 0.5 per cent cash rate by May.

Dr Lowe said the economy was “gradually improving” after a “soft patch” in the past year, due to rate cuts, a rebound in the resources sector, tax cuts and a turnaround in the housing market.

But earlier in his speech, Dr Lowe said that “it’s quite possible — as the evidence accumulates — that we could get even lower than 4.5 per cent” in terms of the full-employment rate of unemployment, making it harder for the Reserve Bank to hit its inflation target with a given level of interest rates.

“Another significant change we’ve seen in Australia is a big increase in labour supply, particularly by women and by older Australians.

“So we’ve had very strong growth in labour demand, employment has been running at 2.5 per cent a year, but simultaneously we’ve had very strong growth in labour supply.

“So it’s turning out in Australia it’s quite hard to create a tight labour market.

“As a result, wage growth is low and it’s certainly lower than the rate that’s consistent with achieving our inflation target. Now none of us know whether these global factors affecting inflation dynamics represent a permanent change but I think we do know that it’s highly persistent.

“It has certainly run for the better part of a decade and can probably run for another decade. As a result we’ve having quite trouble hitting our inflation targets.”