The RBA has admitted further rate cuts will do little to help the economy as global politics takes its toll

Rate cuts are struggling to break through to stimulate economies (Photo by Harry How, Getty Images)
  • RBA governor Phillip Lowe, who is on track to cut the official interest rate in Australia towards zero, has indicated that he doesn’t believe it will do a whole lot to help the economy.
  • Speaking to other central bankers at the exclusive annual economic symposium in the US, Lowe said cutting rates “has its limitations” and further cuts couldn’t do much due to political uncertainty.
  • Despite Lowe’s belief in the impact of the measure, expectations are he will continue cutting the interest rate this year and into the next.

Around the world, central banks — including the Reserve Bank of Australia (RBA) — look set on either slashing interest rates or keeping them at record lows as the world economy stalls.

But now the very person in charge of cutting rates in Australia has revealed he isn’t actually convinced it’ll do much at all to stimulate growth.

Gathered at the exclusive annual economic symposium in Jackson Hole in the US state of Wyoming, RBA governor Phillip Lowe said global political uncertainty had helped erode confidence in the economy and nullify the impact of cuts.

“If firms don’t want to invest because of elevated uncertainty, modest changes in interest rates aren’t likely to lead them to invest,” RBA governor Phillip Lowe said over the weekend, as reported by the Australian Financial Review.

Lowe’s comments were heard by his overseas counterparts who have either been expected to lower rates — as in the case of the US Federal Reserve chair Jay Powell — or maintained already low or negative interest rates — like Japan and Germany.

However, as the world’s largest economies collectively lurch towards or stay near 0% interest rates, the impact of interest rate cuts — or monetary easing — is also lessened, Lowe warned.

“Any individual central bank knows that the part of the transmission mechanism from an easing of monetary policy is a depreciation in the exchange rate,” he said. “But if all central banks ease in response to global political shocks there is no exchange channel for any individual central bank.”

“We trade with one another. Not with Mars… this means that monetary policy responding to global political shocks isn’t going to get the normal exchange rate effect. And I think monetary easing has its limitations as a result.”

What lower interest rates will achieve, Lowe acknowledged, is inflated asset prices.

“We can be confident that lower interest rates will push up asset prices… and we’ve had problems as a result of that,” Lowe said.

Lowe’s admission comes just days after economists warned that the RBA’s rate cuts could do just that in reinflating house prices.

Despite slashing the Australian interest rate to its historic low of 1%, it’s not the first time Lowe has signalled he is not confident cuts will do the trick.

Fronting the parliamentary economics committee earlier this month, Lowe acknowledged that interest rates may have to go toward zero to support a weakening Australian economy. However, he also suggested to federal MPs that the Australian government may need to do much more to support the economy.

“If growth failed to pick up, and the unemployment rate started rising noticeably, then all arms of public policy would need to address how to combat that. Lower interest rates, in that scenario, would be an option, as I hope fiscal measures would be as well, from both the state and the federal governments—and a package of structural reform as well,” Lowe said at the time.

Not everyone was impressed by the suggestion.

“[Lowe] is the governor of the RBA, he’s got no influence, in any way shape or form on infrastructure spending [or] on tax policy,” former Labor economic adviser Stephen Koukoulas told Business Insider Australia regarding Lowe’s appearance then.

“At the end of the day, he’s in charge of monetary policy… if he was genuinely serious about rekindling growth and getting a bit of extra activity, [and] pushing the Aussie dollar down to 60 cents…he still has 100 basis points of rates to cut. What’s he waiting for?”

Lowe’s latest comments in the US just might have answered that question.