MNI POLICY: RBA Rate Decision Risk/Stimulus Balance: Lowe

-- RBA Can Act Again If Need 

-- Coronavirus Impact For Aus Economy Unclear

By Lachlan Colquhoun

     SYDNEY (MNI) - The need to strike a balance between policy stimulus and the

risks from low rates was a major factor behind the Feb. 4 decision to keep

official policy rates unchanged, Reserve Bank of Australia Governor Philip Lowe

said Wednesday.

     However, he accepted there would be a stronger case to cut again id the

economy failed to recover as currently expected, adding that it was unclear yet

what impact coronavirus could have on the Australian economy.

     Speaking at the National Press Club in Canberra, Lowe said the decision to

leave rates at 0.75% was in part because of "the costs and risks associated with

very low interest rates," including rising asset prices, particularly in the

property sector.

     While lower rates would assist "balance sheet adjustment" by households and

support exports through a lower Aussie dollar, there were "increased concerns"

about the impacts on resource allocation and "on the confidence of some people."

     "Lower interest rates could also encourage more borrowing by households

eager to buy residential property at a time when there is already a strong

upswing in housing prices in place," Lowe said.

     "If that occurs, this could increase the risk of problems down the track.

So there is a balance to be struck there."

     --TRANSMISION

     The RBA cut rates three times last year down to the current record low

0.75%, and Lowe said the impact of these cuts was still in transmission.

     He pointed to recent falls in unemployment to 5.1%, and an increase in

inflation to 1.8% as evidence that monetary policy setting were "gradually"

beginning to stimulate the economy, noting the keys to the RBA's outlook in 2020

would be movements in employment and inflation.

     "If the unemployment rate were to be trending in the wrong direction and

there was no further progress being made towards the inflation target, the

balance of arguments would change," said Lowe.

     "In those circumstances, the Board would see a stronger case for further

monetary easing."

     He said the RBA estimated that the recent bushfire crisis would reduce GDP

growth by "around 0.2 percentage points" across the two quarters, but growth for

2020 would be "largely unaffected."

     The RBA still sees 2.75% GDP growth over 2020 and 3% in 2021. The ongoing

drought would result in a 10% decline in farm output, "representing a drag on

GDP growth of around a quarter of a percentage point."

     On the Coronavirus, Lowe said that it was too early to tell what the

overall impact would be, but said that the 2003 SARS outbreak provided a guide.

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

--MNI Sydney Bureau; +61 405322399; email: lachlan.colquhoun.ext@marketnews.com

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