RBA governor Philip Lowe sets scene for October rate cut

At a speech in regional NSW, RBA governor Philip Lowe said the bank can no longer ignore the global rates downshift.

Reserve Bank of Australia governor Dr Philip Lowe. Picture: AAP

The Reserve Bank of Australia looks set to lower its official interest rate for the third time this year in October as it moves to keep pace with the recent flurry of cuts by global peers and its confidence in the domestic outlook appears increasingly shaken.

RBA governor Philip Lowe told a business audience in Armidale, New South Wales on Tuesday that the downward drift in global interest rates couldn’t be ignored, as doing so would risk a damaging rise in the Australian dollar.

“We can’t ignore structural shifts in global interest rates. If we did ignore these shifts, our exchange rate would appreciate,” he said.

“At our board meeting next week [October 1], we will again take stock of the evidence … The board is prepared to ease monetary policy further if needed,” Dr Lowe said.

The RBA lowered its official cash rate back-to-back in June and July from 1.50 per cent to a record low 1.0 per cent. The first cuts since 2016 were triggered by weak inflation and the slowest GDP growth in a decade. A further reduction in the cash rate to 0.75 per cent in October would bring Australia closer to rolling out alternative policy measures to support the economy.

Dr Lowe appeared uncertain about the trajectory of GDP growth going forward. He said that while there were now signs of a gentle economic recovery, “the strength and durability of this pick-up remains to be seen”.

Dr Lowe said he expected inflation to remain below the desired level of 2.5 per cent for some time to come.

Financial markets moved aggressively last week to price in an October rate cut after minutes of the RBA’s September 3 policy meeting indicated rising concern over the world growth outlook.

The minutes were quickly followed by news of a rise in unemployment to 5.3 per cent in August from 5.2 per cent in July — the highest level in a year — and well above the RBA’s estimate of full unemployment that it set at 4.5 per cent earlier this year.

Growing concern among RBA members about falling global interest rates and the risks posed to the Australian dollar comes after the US Federal Reserve last week cut interest rates for a second time this year. Just last month the Australian dollar hit its lowest levels in 10 years versus its US counterpart and AUD-USD exchange rate has shed about 4 per cent so far this year, according to FactSet.

The Fed’s reduction followed hard on a cut by the European Central Bank which also reintroduced a bond buying program to support its flagging economy.

“We live in an interconnected world, which means that we cannot completely insulate ourselves from long-lasting shifts in global interest rates,” Dr Lowe said.

Global economic data has continued to deteriorate, with manufacturing numbers out of Europe this week pointing to the weakest conditions in nearly seven years, particularly in powerhouse Germany.

Dr Lowe has recently returned home from central bank meetings in the US, Asia and Europe, where rising fears about the US-China trade war dominated talks.

Policy makers feared that an absence of certainty for businesses amid rising protectionism would dampen investment and kerb employment growth, scuttling global growth further in 2020.

Incoming ECB President Christine Lagarde warned this week that the trade war was now the biggest hurdle facing the world economy.

Central bankers have warned that monetary policy is reaching the limits of its usefulness, calling on governments to ramp up spending and help steer economies away from recession.

Dow Jones Newswires