Reserve Bank of Australia governor Philip Lowe has signalled a further cut in the cash rate is on the cards as the central bank does it bit to support the recovery from recession.
Addressing the annual Citi Australian and New Zealand investment conference, Dr Lowe said the RBA board had been considering what more it could do to support jobs, incomes and businesses.
“When the pandemic was at its worst and there were severe restrictions on activity, we judged that there was little to be gained from further monetary easing,” Dr Lowe said on Thursday.
“As the economy opens up, though, it is reasonable to expect that further monetary easing would get more traction than was the case earlier.”
While an easing in policy helps people get jobs, helps private sector balance sheets and lessens the number of problem loans, this has to be weighed against the impact of low interest rates on people who rely on interest income.
The board also has to take into account what is happening internationally.
“Australia is a mid-sized open economy in an interconnected world, so what happens abroad has an impact here on both our exchange rate and our yield curve,” Dr Lowe said.
He said the board will continue to review these and other issues at its upcoming meetings.
Dr Lowe’s comments come against the backdrop of speculation the central bank could cut its key cash interest to 0.10 per cent, from a current record low 0.25 per cent, at its next board meeting on November 3.
“The governor has made it very clear that we can expect to see more monetary policy easing from the RBA,” Commonwealth Bank senior economist Kristina Clifton said.
Economists expect similar adjustments to the Reserve Bank’s three-year bond yield target and its term funding facility rate for banks, as well as extending its bond buying into five to 10-year maturities.
However, Dr Lowe said the central bank would not be increasing the cash rate until actual inflation was sustainably within the two to three per cent target range.
“It is not enough for inflation to be forecast to be in the target range,” he said.
Likewise, Dr Lowe said the board wanted to see more than just progress towards full employment and a return to labour market conditions consistent with inflation being sustainably within the target range.
“On our current outlook for the economy – which we will update in early November – this is still some years away. So we do not expect to be increasing the cash rate for at least three years,” he said.
He said last week’s federal budget provided welcome support for the economy.
“The various measures will provide ongoing support to disposable incomes and help boost aggregate demand,” he said.
“Policies of a structural nature will also help build the road to the recovery.
“I expect that this will help reinforce what I hope to be improving confidence on the health front.”