MNI POLICY: RBA Gov Lowe Points To Change In Rate Move Bias

By Lachlan Colquhoun

     SYDNEY (MNI) - The Reserve Bank of Australia may amend its official forward

guidance, after Governor Philip Lowe told the National Press Club the

probabilities of the next move in rates being either up or down are now more

evenly balanced.

     Here are five key points from his speech:

Change in language on interest rates. 

The RBA has persisted in a more optimistic view of the economy but a continual

flow of disappointing data combined with the changing global outlook may have

begun to change the Bank's thinking. Previously, the RBA has maintained its view

that the next move in official interest rates, currently at 1.5%, is more likely

to be up but in his speech Lowe said: "Looking forward, there are scenarios

where the next move in the cash rate is up and other scenarios where it is down.

Over the past year, the next-move-is-up scenarios were more likely than the

next-move-is-down scenarios. Today, the probabilities appear to be more evenly

balanced." The RBA Governor went on to say that it was possible that the economy

is "softer than we expect." "In the event of a sustained increased in the

unemployment rate and a lack of further progress towards the inflation

objective, lower interest rates might be appropriate at some point," he said.

Downside risks increasing, but outlook solid. 

Lowe said that the RBA still believed that despite an increase in downside

risks, the outlook for the global economy was still "supportive" for Australia.

There was, he said, a "change in momentum" late last year which was evident in

both Europe and China. Even so, he said he as "a little surprised" at the

reaction to the lowering of global growth forecasts, which had been "quite

negative."

Weak wages hampering global growth. 

The RBA Governor said the "accumulation of downside risks" was a concern, and he

listed U.S.-China trade tensions, Brexit in the UK, and the "rise of populism"

which had seen reduced support from the US for the "liberal order." This was

undermining a broad-based risk in living standards, and for many people this was

resulting in an extended period "of little or no wages growth".

Australian 2019 growth seen at "around 3%. 

In their Feb 5 interest rate decision, the RBA said it expected domestic growth

of around 3% in 2019, a revision on the December forecast of a little more than

3%. Lowe repeated this in his speech, and also forecast lower growth of 2.75%

for 2020. "This type of growth should be sufficient to see further gradual

progress in lowering unemployment," he said.

Housing slump is "manageable. 

Much of the focus in recent months has been on falling house prices,

particularly in major markets of Sydney and Melbourne. This has led to calls for

the RBA to change its stance and move to cut rates, but in his speech today Lowe

said the RBA believed the declines were a "manageable adjustment in the housing

market." "It is not expected to derail economic growth," he said. "The previous

trends in debt and housing prices were becoming unsustainable and some

correction was appropriate. We recognise that this correction will have an

effect on parts of the economy. But our economy should be able to handle this,

and it will put the housing market on a more sustainable footing."

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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