Imminent rate cut on cards as RBA says job market not strong enough

The Reserve Bank of Australia is considering an urgent follow-up cut in official interest rates, declaring current settings are failing to make inroads into the economy while admitting heavily indebted households could be weighing on the jobs market.

In a sign of the RBA's growing concerns about the economy, governor Philip Lowe on Thursday ramped up his calls for all governments to fast-track major infrastructure spending in a bid to slash the unemployment rate.

RBA governor Philip Lowe has signalled a follow-up interest rate cut, admitting more has to be done to get unemployment down.Credit: Attila Csaszar

Markets now believe the RBA is all but guaranteed to cut rates at its July 2 board meeting, taking them to a fresh record low of 1 per cent. That would follow its 0.25 percentage point rate cut to 1.25 per cent earlier this month.

The last time the RBA cut rates in consecutive months was in the first half of 2012. On that occasion, it cut rates by half a percentage point in May and followed that with a quarter of a percentage point move in June that took the cash rate to 3.5 per cent.

Dr Lowe used a speech to the Committee for Economic Development of Australia in Adelaide to argue that despite strong employment growth over recent years, there was still "considerable spare capacity" across the jobs market.

He signalled that to deal with "significant" underemployment and sluggish wages growth, another rate cut was on the agenda.

"The most recent data – including the GDP and labour market data – do not suggest we are making any inroads into the economy's spare capacity. Given this, the possibility of lower interest rates remains on the table," he said.

"It is not unrealistic to expect a further reduction in the cash rate as the [RBA] board seeks to wind back spare capacity in the economy and deliver inflation outcomes in line with the medium-term target."

Dr Lowe made clear there were limitations to what could be achieved solely with low interest rates, urging governments of all persuasions to boost their own efforts.

"As a country, we should also be looking at other ways to get closer to full employment. One option is fiscal policy, including through spending on infrastructure," he said.

"Another is structural policies that support firms expanding, investing, innovating and employing people. Both of these options need to be kept in mind as the various arms of public policy seek to
maximise the economic prosperity of the people of Australia."

Economists with both the Commonwealth Bank and the NAB said in light of Dr Lowe's comments, it now appeared the RBA was likely to cut rates at its July 2 meeting before a follow-up in November.

NAB chief economist Alan Oster said the federal government should also use the company tax revenue gains it was enjoying because of the surge in iron ore prices to develop a stimulus package in the second half of the year.

"Windfall company tax gains from unexpectedly high iron ore prices could help fund such stimulus, which could involve some mix of bringing forward planned tax cuts, cash handouts and increased near-term infrastructure spending," he said.

Dr Lowe said it appeared fewer people were moving between jobs in a sign they were worried about their economic futures.

"This might be especially so if you also have a large mortgage. So it is possible that the high level of household debt is also affecting labour market dynamics," he said.

He made the comments as new Australian Bureau of Statistics figures showed the agriculture, mining and health sectors shed thousands of jobs between February and May, with healthcare alone down by almost 20,000 positions in seasonally adjusted terms.

Construction and manufacturing gains balanced the figures, while retail - the country’s largest employer - returned to its February 2018 level of 1.3 million employees after struggling for months.

The number of construction workers increased in the May quarter, offsetting a drop in other sectors.Credit: Glenn Hunt

Dr Lowe also said an increase in the rate of Newstart "would be helpful" and that any policies boosting household consumption would "be a good thing right now".

The level of the unemployment benefit has not been raised in real terms in more than two decades and recipients cover bills and living costs on $40 a day.

The Australian Council of Social Services, Business Council of Australia and former prime minister John Howard have all said it should be raised, but the Morrison government has said it has no plans to do so.