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Australia's central bank will consider a rate cut at June meeting, governor says

Key Points
  • Australia's central bank will consider the case for lower interest rates at its June policy meeting, Governor Philip Lowe said in a speech on Tuesday.
  • That provides the clearest signal yet the next move in rates would likely be down.
  • A cut would be the first since the RBA's last easing to a record low 1.50% in August 2016. Financial markets are currently pricing in a 50-50 chance of a lower rate in June.
The Reserve Bank of Australia headquarters in the central business district of Sydney, Australia.
Lisa Maree Williams | Bloomberg | Getty Images

Australia's central bank will consider the case for lower interest rates at its June policy meeting, Governor Philip Lowe said in a speech on Tuesday, providing the clearest signal yet the next move in rates would likely be down.

"A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target," Reserve Bank of Australia (RBA) Governor Philip Lowe said in Brisbane.

"Given this assessment, at our meeting in two weeks' time, we will consider the case for lower interest rates."

A cut would be the first since the RBA's last easing to a record low 1.50% in August 2016. Financial markets are currently pricing in a 50-50 chance of a lower rate in June.

The RBA is battling a steep slowdown in the country's A$1.9 trillion ($1.31 trillion) economy, lukewarm inflation and sluggish consumer spending.

Until now, the jobs market was the only bright spot but the  latest data showed the unemployment rate ticking up to 5.2% in April from near decade lows of 4.9%.

The RBA's own expectations is for employment growth to slow over time.

Lowe said his judgment was that the country's economy can support an unemployment rate of below 5% without raising inflation concerns.

"In the event that the unemployment rate does not move lower with current policy settings, there are a number of options," Lowe said in a speech titled 'The Economic Outlook and Monetary Policy' in Brisbane.

Lowe referred to further monetary easing, additional fiscal support including through spending on infrastructure and structural policies that support business investments as likely policy options.

"Relying on just one type of policy has limitations, so each of these is worth thinking about. The Reserve Bank Board recognizes that monetary policy has a role to play here," he noted.

Lowe said the main reason for the shift in the country's economic momentum - growth braked to an annualized 0.8% in the December quarter — was a slowdown in household consumption.

Over the second half of 2018, consumer spending ticked up by just 0.75%, "an unusually soft outcome," he noted.

While crumbling property prices were one factor, Lowe pointed to the long period of weak growth in household income.

Over the past three years, household disposable income has increased at an average rate of just 2.75% compared with an average 6% over the preceding decade.

"As this period of weak income growth has persisted, it has become harder for households to dismiss it as just a temporary development — as something that will pass quickly," Lowe said.

"The end result has been that many people have decided to adjust their spending plans."

Lowe called on the newly elected center-right coalition government to play its part in boosting household incomes.

"Stronger growth in income will help, but the more important factor is some tax relief," Lowe said while noting tax paid by households over the past year jumped 10%, a much faster clip than income growth of a measly 3.25%.

"That is a big difference and it is unusual."

But Lowe will probably have to wait as the government led by Prime Minister Scott Morrison might not meet a June deadline for tax breaks as parliament may be unable to convene in time.