Inflation is weak and uncertainty is high, and until that changes the RBA isn't going to lift interest rates

Clarence Williams/Los Angeles Times via Getty Images
  • BA Governor Philip Lowe just spoke to the Australia-Israel Chamber of Commerce in Western Australia.
  • He sees little justification for a near-term adjustment in rates, but still thinks the next move is likely to be higher rather than lower.
  • Lowe says an increase will likely shock a few borrowers, but points out when it comes it will likely be because the economy is strengthening.

The Reserve Bank of Australia is uncertain.

Uncertain about the outlook for the global economy, especially when it comes to trade. It’s also uncertain about whether Chinese policymakers will be able to manage the buildup of risks within its financial sector. And, closer to home, it is also uncertain about how high levels of indebtedness will impact Australia’s household sector, especially its ability to spend.

And with inflationary pressures still expected to lift only gradually in the years ahead, and until that uncertainty lessens, it says there’s little reason to justify a near-term increase in interest rates.

That’s the concise view of RBA Governor Philip Lowe’s speech to the Australia-Israel Chamber of Commerce in Western Australia today with Australia’s top banker providing little sign of urgency to begin normalising interest rates like his colleagues in the Northern Hemisphere.

Indeed, much of the speech was a re-hash of previous commentary used by the bank.

“We expect a further pick-up in the Australian economy,” Lowe told the audience.

“Increased investment and hiring, as well as a lift in exports, should see stronger GDP growth this year and next. The better labour market should lead to a pick-up in wages growth. Inflation is also expected to gradually pick up.

“So, we are making progress.”

And, therefore, he still thinks the next move in interest rates is likely to be higher rather than lower.

“It is more likely that the next move in the cash rate will be up, not down, reflecting the improvement in the economy,” Lowe said.

Lowe said when the point comes when the RBA does finally raise rates, it will likely shock more than a few, pointing out that it has now been over seven years since the board last increased interest rates.

However, while that will surprise those who have never seen official rates move higher as their time as a borrower, Lowe said this should not be something to fear as it will mean the Australian economy is improving.

“It is worth remembering that the most likely scenario in which interest rates are increasing is one in which the economy is strengthening and income growth is also picking up,” he said.

But Lowe does not think the economy is at that point yet.

“Because the progress is expected to be only gradual [in lowering unemployment and bringing inflation back to its 2.5% midpoint target], the Reserve Bank Board does not see a strong case for a near-term adjustment in monetary policy,” he said.

“A continuation of the current stance of monetary policy in Australia will help our economy adjust and should see further progress in reducing unemployment and having inflation return to target.”

Reinforcing the view that rates are unlikely to change anytime soon, Lowe acknowledged yet again that the RBA does not have to lift rates simply because other central banks are.

“While some other central banks are raising their policy rates, we need to keep in mind that their economic circumstances are different and that they have had lower policy rates than us over the past decade, in some cases at zero or even below,” he said.

There has been no market reaction to the speech, reflecting that it contained very little new information.

As has been the case for sometime now, upcoming wage, employment and inflation data will largely determine if and when the RBA begins to normalise policy settings.

Given recent weakness in east coast property markets, housing data is also becoming increasingly important given the implications for household spending.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.