Bill Evans, Westpac’s chief economist, is arguably Australia’s most influential chief economist.
That’s because he’s been in the job for a very long time, and often makes out-of-consensus forecasts like last December’s call that the RBA would cut in February. It’s also because Westpac has such a huge presence in financial markets in Australia and around the world.
So the fact that he believes RBA governor Stevens’ warning last week – that Australia’s potential lower growth rate reduces the chance of a rate cut – is worth listening to.
The Governor has now raised the case (as clear as you can expect from cautious central bankers) that “trend” growth may be lower.
If, for example, the Bank revises its assessment of trend growth to 2.75%, then it is highly unlikely that it would see a case for below trend growth in its 2016 November growth forecast, virtually eliminating the case for lower rates in November.
We say, virtually, because the Bank could take another tack by asserting that its growth forecasts, while lower, were still consistent with stabilising and eventually falling unemployment. But, equally, a reasonable person could argue that a 6.00% unemployment rate still signals considerable spare capacity in the labour market and any central bank with scope for further stimulus should not be satisfied with a growth forecast that only implies a very slow easing in the unemployment rate.
From our perspective, the most likely policy scenario is that the Bank will have to lower its 2016 growth forecast through the August/November forecasting rounds, but because it now
has both quantitative and qualitative evidence that, like other developed economies, trend growth has taken a step down since the GFC, it can still argue that growth in 2016 will be above or at trend, hence no policy response will be required.
In plain English, then: If the potential growth rate is lower, then monetary policy won’t help. But also unemployment won’t rise as fast with the lower rate.
Either way, rates won’t need to be lowered unless the economy really slows down.