Australia cannot “insulate” itself and “ignore” shifts in global interest rates, Reserve Bank governor Philip Lowe has said, hinting at further reductions to the cash rate.
In an address to the Armidale Business Chamber, governor of the Reserve Bank of Australia (RBA) Philip Lowe has noted the shift in the global economic environment, particularly in light of the US Federal Reserve and the European Central Bank’s (ECB) new wave of interest rate cuts.
Mr Lowe said that monetary policy easing abroad would place downward pressure on the Australian dollar, reinforcing the need for further cuts to the cash rate.
“We live in an interconnected world, which means that we cannot completely insulate ourselves from long-lasting shifts in global interest rates,” he said.
“Our floating exchange rate gives us a degree of monetary independence, but we can’t ignore structural shifts in global interest rates.
“If we did seek to ignore these shifts, our exchange rate would appreciate, which, in the current environment, would be unhelpful in terms of achieving both the inflation target and full employment.”
Mr Lowe said that a low global rate environment would remain entrenched until “factors leading to a depressed appetite to invest relative to the appetite to save” are addressed.
“Whether or not this will happen, time will tell,” he added. “But as a small open economy, we have to take the world and global interest rates as we find them.”
The RBA governor also pointed to spare capacity in the domestic market, stating that the economy “can sustain lower rates of unemployment and underemployment than previously thought likely”.
“The flexibility of labour supply also means that strong rates of employment growth can be sustained without inflation becoming a problem – these are both positive developments,” he said.
Mr Lowe added that while inflation is expected to “pick up”, it would likely remain below the midpoint of the target range “for some time to come”, conceding that more cuts may be required to make inroads towards the RBA’s inflation and unemployment targets.
“The decisions to ease monetary policy in June and July were taken to help make more assured progress towards full employment and the inflation target,” he said.
“Further monetary easing may well be required.
“While we are at a gentle turning point and expect growth to pick up, the strength and durability of this pick-up remains to be seen.”
Analysts are expecting at least one additional cut to the cash rate from the RBA before the close of 2019.
According to AMP Capital chief economist Shane Oliver, the central bank may lower rates twice in the coming months, taking the cash rate to a new record low of 0.5 per cent.
The RBA’s next monetary policy board meeting will be held on Tuesday, 1 October.
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