MNI POLICY: RBA Lowe "Not Unreasonable" To Expect Further Cut

By Lachlan Colquhoun

     SYDNEY (MNI) - Expectations of a further interest rate cut by the Reserve

Bank of Australia are "not unreasonable" although no decision had yet been

taken, Governor Philip Lowe said Tuesday.

     "It is not unreasonable to expect a lower cash rate ... Our latest set of

forecasts were prepared on the assumption that the cash rate would follow the

path implied by market pricing, which was for the cash rate to be around 1% by

the end of the year," Lowe said in Sydney.

     He also called on banks to pass on the full cut to lenders, particularly

those with mortgages. His comments came after the RBA's decision earlier in the

day to cut official interest rates by 25 basis points to a record low of 1.25%.

     Here are other notable points from Lowe's speech.

Accumulation of evidence 

     Lowe said that after holding rates steady for more than two and a half

years, the decision was prompted by an "accumulation of evidence" on two points:

inflationary pressures are subdued and will remain so and there is "significant

spare capacity" in the labour market.

Labour market the key 

Lowe said the RBA outlook depended largely on conditions in the labour market,

and whether one cut would provide sufficient stimulus. "It is possible that

current policy settings will be enough, that we just need to be patient," he

said. "But it is also possible that the current policy settings will leave us

short. Given this, the possibility of lower interest rates remains on the

table."

Fiscal policy to the rescue? 

While the RBA is completely apolitical, Lowe did note the option of "fiscal

support" including spending on infrastructure, to boost the economy. Monetary

policy, he said, was "not the only option" and as a country Australia should be

looking at other options.

Structural reform 

In addition to fiscal policy, Lowe advocated for "structural policies" which

supported "firms expanding, investing, innovating and employing people." Given

the RBA's narrow remit around monetary policy, this was a thinly veiled call to

the newly elected Government to take action.

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

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