Despite suggestions from Reserve Bank of Australia (RBA) and its Governor, Philip Lowe, that changes in the cash rate are unlikely to happen anytime soon, RBA Assistant Governor Christopher Kent has given rise to sentiment that a change may well be on the horizon.
Kent seemed unwilling to say which way the cash rate would go and added that this will depend on market reaction over the next few months. He said it would be difficult to rule out lowering the cash rate, although this would fly in the face of RBA’s intentions to gradually increase it to taper inflation fears.
Amid general expectations that inflation will creep up slowly, one of the ways of ensuring more control over it is by adjusting the cash rate, which has stayed in place since August 2016. This is a lengthy period of time, especially in the face of some jittery and volatile market movements. The last change was a reduction that lowered the cash rate to 1.50%.
Lowe has said in the last few weeks that he strongly opposes any further cuts to the cash rate, adding that this does not represent the ‘national interest’ and would only cause further problems in the housing market, where there have been suggestions of unsustainable levels of debt in some areas.
However, Kent has since given the impression that new sets of data may well change RBA’s decision, as financial markets have been shifting in recent weeks. He did describe the chances of anything happening in the immediate term as ‘fairly small.’
The futures markets have bumped up expectations that a drop in the cash rate is coming, as data from last week showed that the Australian economy’s growth is beginning to slow, with the GDP rising just 0.3% in the last quarter. This poses a difficult question for RBA, which will want to stay true to its word but is aware of the need for market stimulus if this continues. A cash rate cut happening in 2019 has now increased to a 12% probability according to futures, although it was seen as very unlikely just last week.
Kent told an audience in Sydney that although RBA has planned to bump up the cash rate, this does not mean that the bank would not reduce it if all the evidence suggests that this was what it needs to do. He added: ‘We have said that it’s likely the next move is up; it doesn’t mean if it’s needed the next move might not be down.’
To reassure investors that everything is in hand, RBA has moved quickly to dispel any notion that a struggling housing market and changes in disposable income for the average Australian could derail the economy. Kent said that he still believes that the cash rate will go up because of ‘a gradual fall in unemployment and a gradual rise in inflation.’
The central bank has received good jobs news recently, as the latest figures showed that the number of people without work is at a six-and-a-half year low of 5%. This should improve even further into mid-2020, according to current forecasts.