- Philip Lowe, the Governor of Reserve Bank of Australia (RBA), has revealed what he’s looking at before making another interest rate cut.
- Lowe said the RBA was considering “further easing” but believed it would make a bigger impact after the economy reopens further.
- “This benefit needs to be weighed against any additional risks as people take more investment risk in the search for yield,” he said on Thursday.
- Visit Business Insider Australia’s homepage for more stories.
Australian economists have been sent back to the drawing board, after speculating that another interest rate cut was almost a coin toss.
Reserve Bank of Australia (RBA) Governor Philip Lowe indicated it’s in no hurry to slash the interest rate again from its historic low of 0.25% in a speech delivered on Thursday.
While economists had put the chance of another cut at upwards of 40%, Lowe said there were three major considerations weighing on his mind.
“The first is how much traction any further monetary easing might get in terms of better economic outcomes,” Lowe said.
“As the economy opens up, though, it is reasonable to expect that further monetary easing would get more traction than was the case earlier.”
Employment has certainly begun to bounce back since the middle of the lockdown, with the obvious exception of Victoria, albeit with unemployment remaining elevated nationwide.
It suggests that while a cut is on the cards, Lowe is waiting to unleash it when it’s going to make the biggest impact. As restrictions ease, he said it’s “entirely possible” people will begin to spend the savings buffer they’ve anxiously saved in recent months, stimulating the economy.
Having kept rates on hold this month in anticipation of it, he said the Federal Budget would provide “welcome further support to the economy” in this regard.
“This fiscal support necessarily involves increased borrowing. For a country that became used to low budget deficits and low levels of public debt, this is quite a change. But it is a change that is entirely manageable and affordable and it is the right thing to do in the national interest,” Lowe said.
Similarly, the RBA board is considering when another interest rate cut will be for the benefit of the country.
“A second issue is the possible effect of further monetary easing on financial stability and longer-term macroeconomic stability,” Lowe said.
By cutting Lowe knows he can help create jobs and reduce the danger of Australians defaulting on their loans. But of course in economics, there’s always a trade-off.
“This benefit needs to be weighed against any additional risks as people take more investment risk in the search for yield,” he said, worried that Australians may move out of safer investments and potentially bite off more than they can chew.
“We also need to take into account the effect of low-interest rates on people who rely on interest income.”
Lastly, Lowe said he was concerned with what Australia is doing compared to action taken by other countries and central banks.
“We are committed to do what we reasonably can, with the tools we have, to support the recovery of the Australian economy,” he said.
Exactly how much it can really move the dial remains unclear.