Reserve Bank Governor Philip Lowe says it is “not unreasonable” to expect that interest rates will get cut further this year, although no decision has been made.
“Much will depend on how the evidence evolves, especially on the labour market,” Mr Lowe said in a dinner speech to the business community on Tuesday night.
Many economists have predicted a second rate cut before the end of the year that would leave Australia’s interest rate at 1.0 per cent.
But Mr Lowe said that monetary policy wasn’t the only way to reduce unemployment; there were also fiscal policies such as increase spending on infrastructure and structural policies that support firms expanding and hiring people.
From his perspective, Mr Lowe said, structural policies to support a “dynamic business sector” were a better option to create jobs than interest rate cuts or fiscal stimulus.
“Structural policies not only help with job creation, but they can also help drive the productivity growth that is the main source of improvement in our living standards,” he said.
Mr Lowe also broke from his usual practice and called on banks to fully pass on the reduction in the cash rate to customers through lower standard variable mortgage rates.
Mr Lowe said banks have benefited from a reduction in raising funds in wholesale markets and so should pass on the lower cash rate in full with lower mortgages.
So far ANZ has said it wouldn’t be passing the full 25 basis point reduction on to its customers, offering them just an 18 point reduction.
Commonwealth and NAB have said they will pass along the full rate cut to their mortgage customers.
Mr Lowe reassured Australian business leaders that the decision to cut rates wasn’t in response to a deterioration in the country’s economic outlook.
“The economic outlook remains reasonable, with the main downside risk being the international trade disputes, which have intensified recently,” Mr Lowe said.
“The Australian economy is still expected to strengthen later this year, supported by the low level of interest rates, a pick-up in growth in household disposable income, ongoing investment in infrastructure and a brighter outlook for the resources sector.”
The rate cut reflects that the Australian economy is likely to have “spare capacity” for awhile, Mr Lowe said.
It will help the country keep reducing unemployment and making progress towards the inflation target of two to three per cent, he said. It was last at 1.5 per cent.