RBA’s Philip Lowe dampens rate cut talk as inflation eases

Low inflation won’t push the Reserve Bank to cut interest rates again, says governor Philip Lowe.

Reserve Bank governor Philip Lowe speaks in Sydney yesterday.

Entrenched low inflation will not push the Reserve Bank to cut interest rates again while unemployment is steady and stretched household balance sheets pose a risk to financial stability.

In a speech to market economists yesterday, RBA governor Philip Lowe eschewed a rigid focus on the central bank’s 2-3 per cent inflation target due to the risk that automatically cutting interest rates in response to low inflation could cause a further overheating of the property market.

“Australia’s monetary policy framework is better placed to deal with this world than some others,” Dr Lowe said.

“We have a flexible medium-term inflation target that allows ­financial stability considerations to be taken into account in the setting of monetary policy.”

The RBA has kept the official cash rate at a record low of 1.5 per cent since August last year, fuelling fast-paced growth in the property market in the eastern states that regulators have since attempted to control through a second round of so-called macroprudential curbs on risky lending.

Dr Lowe’s comments came as the Australian Bureau of Statistics figures showed a low inflation rate has persisted. The consumer price index fell to 1.9 per cent in the June quarter — against market expectations of 2.1 per cent — amid lower prices for petrol and domestic holiday travel, as well as an unexpected fall in fruit and vegetable prices despite supply disruptions from Cyclone Debbie.

The average of underlying or “core” inflation measures — which strip out volatile items — rose 1.8 per cent as expected, in line with the RBA’s forecast of 1.75 per cent for the year to June.

The dollar lost steam after the CPI data, falling from US79.35c to US78.78c.

Market expectations of higher official cash rates in 12 months slipped from 82 per cent to 80 per cent.

The RBA governor warned that inflation may stay “low for longer” globally if slow wage growth was more persistent due to increasing competition for jobs from globalisation, robots and technological change that opened the economy to greater international competition.

“Perhaps as a consequence of this extra competition — or perhaps as a consequence of other ­forces within our societies — many workers in advanced economies feel that the world is less ­secure — less secure economically and less secure politically,” Dr Lowe said in a speech to the Anika Foundation in Sydney. “This means that security is valued more highly. With a greater premium on security, it’s plausible that workers are less inclined to take a risk by seeking larger wage increases.”

He also noted that a related aspect of the current labour market had been a decline in job mobility.

AMP Capital chief economist Shane Oliver said the latest figures showed the economy was still ­experiencing growth that was falling short of long-term trends and spare capacity in the labour ­market.

“We think that below-trend growth and a soft inflation backdrop will keep the Reserve Bank on hold until the end of 2018 or even early 2019,” Dr Oliver said.

Despite the rebalancing of economic growth and employment after the end of the mining boom, the share of employed people changing employers is about the lowest in recent decades.

“It is likely that in an environment of less job security, fewer people are inclined to switch employers,” Dr Lowe said.

“There is also a demand-side effect, with fewer firms attempting to attract workers from other firms. This is consistent with subdued wage growth.”

But while acknowledging a potential scenario globally where inflation is harder to generate because lower rates of unemployment do not generate as much growth in wages as the past, Dr Lowe cautioned that interest rate cuts can push asset prices higher and encourage more borrowing.

“Faced with low inflation, low unemployment and low interest rates, investors are likely to find it attractive to borrow money to buy assets,” Dr Lowe said.

“This poses a medium-term risk to financial stability.”

He said the RBA had been paying close attention to the risks in household balance sheets from household debt that was “high and rising faster than the unusually slow growth in incomes”.

“These developments have had a bearing on the setting of monetary policy,” he said.

“We have not sought to stimulate a rapid lift in inflation. The fact that the labour market has been generating sufficient jobs to keep the unemployment rate broadly steady has allowed us to be patient. Our judgment has been that seeking a more rapid pick-up in inflation through yet further monetary stimulus was likely to add to the medium-term risks. Our central scenario remains for underlying inflation to pick up gradually as the economy strengthens.”

Dr Lowe noted that it was too early to say whether the inverse relationship between unemployment and inflation — the so-called “Phillips Curve” — is the same as it was in the past.

“We can’t yet tell, though, whether the Phillips Curve in Australia has become flatter, given that we have experienced relatively little variation in the unemployment rate over recent times,” he said.

He also stressed that the RBA was “intent on delivering an average rate of inflation over time of between 2 per cent and 3 per cent. We are seeking to do this in a way that supports sustainable growth in the economy and that best serves the public interest.

“To do this we need to understand developments in Australia’s labour market and to take account of our decisions on balance sheets in the economy.”

Still, he dispelled the notion that Australia could be pushed to increase interest rates simply because some central banks were now starting to increase interest rates and others were considering withdrawing some of their monetary stimulus, including quantitative easing.

“This has no automatic implications for monetary policy in Australia,” Dr Lowe said.

“These central banks lowered their interest rates to zero and also expanded their balance sheets greatly.

“Just as we did not move in lock-step with other central banks when the monetary stimulus was being delivered, we don’t need to move in lock-step as some of this stimulus is removed.”