Australia central bank governor says further policy easing may be required

FILE PHOTO: Australia’s new Reserve Bank of Australia (RBA) Governor Philip Lowe speaks at a parliamentary economics committee meeting in Sydney, September 22, 2016. REUTERS/Jason Reed September 24, 2019
By Swati Pandey
Armidale, AUSTRALIA (Reuters) – Further cuts to the cash rate may be needed in Australia, the governor of the country’s central bank said in a speech on Tuesday, ahead of a board meeting next week where policymakers are widely expected to lower interest rates again.
The Reserve Bank of Australia (RBA) chopped interest rates in June and July to a record low of 1%, and financial investors <0#YIB:> are pricing in a 74% chance of a third cut this year to 0.75% at the RBA’s Oct. 1 meeting.

While noting the back-to-back rate cuts, RBA Governor Philip Lowe said “further monetary easing may well be required”.
“At our Board meeting next week, we will again take stock of the evidence.”
Lowe said the RBA Board was prepared to ease policy further if needed and that it was likely an extended period of low interest rates will be required in Australia.
Lowe also listed global uncertainties, including the Sino-U.S. trade war, together with an extreme drought in Australia and sluggish household consumption as among the factors hurting the country’s economic growth.
Australia’s A$1.95 trillion ($1.3 trillion) economy has dodged recession for 28 years but has hit a soft patch with growth slowing to 1.4% last quarter from a year earlier, the weakest in a decade.
Additionally, rising unemployment and snail-paced wages growth were keeping downward pressure on inflation.
Decisions by major global central banks, including the U.S. Federal Reserve, to lower rates in their countries were also playing a part in the RBA’s decision-making, Lowe said.
“We can’t ignore structural shifts in global interest rates,” he told business leaders in the regional New South Wales city of Armidale, about 475 km (295 miles) north of Sydney.
“If we did seek to ignore these shifts, our exchange rate would appreciate, which, in the current environment, would be unhelpful in terms of achieving both the inflation target and full employment.”
The Australian dollar <AUD=D3> has so far fallen about 4% this year on top of a nearly 10% drop in 2018, helping to boost the country’s export sector.

ECONOMIC PUZZLE
Lowe held out hope for a “gentle turning” in the economy, brought about by low interest rates, government tax rebates to millions of households, a weaker Aussie dollar, a brighter outlook for the resources sector and spending on infrastructure.
He expects a modest increase in economic growth in the quarters ahead, although “the strength and durability of this pick-up remains to be seen”.
Even considering the impact of the global growth slowdown, Australia’s drought and weak household consumption, part of the slowing of the country’s economy remains unexplained, Lowe said.
This is especially so taking into account the recent strength in jobs growth, which at 2.5% is faster than the 1.4% growth in the country’s annual gross domestic product.
“Normally, output growth exceeds employment growth, rather than falls short,” he said.
“We are seeking to understand what is going on here. It is possible that it is just measurement noise, but we can’t yet rule out something more structural.”

(Reporting by Swati Pandey in Sydney; Editing by Tom Hogue)

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