ADELAIDE (Reuters) – Australia’s top central banker on Thursday said it was not “unrealistic” to expect a further reduction in interest rates given ample slack in the labor market, and called on the government for action on fiscal stimulus.
Reserve Bank of Australia (RBA) Governor Philip Lowe said it was “unrealistic” to think that a single quarter-point cut in rates would be enough on its own to speed up economic growth. The RBA cut rates to a record low of 1.25% earlier this month.
“Given this, the possibility of lower interest rates remains on the table,” Lowe told an economics conference in Adelaide.
“It is not unrealistic to expect a further reduction in the cash rate as the Board seeks to wind back spare capacity in the economy and deliver inflation outcomes in line with the medium-term target.”
The RBA is hardly alone in easing, with both the U.S. Federal Reserve and the European Central Bank this week reversing course and opening the door to new stimulus.
Futures markets imply around a 58% chance of an RBA rate cut at its next meeting on July 2, while a move to 1% by August is considered a dead certainty. A further move to 0.75% is tipped by year-end.
Lowe was blunt in his assessment of the need for stimulus.
“The most recent data – including the GDP and labor market data – do not suggest we are making any inroads into the economy’s spare capacity,” he said.
Annual growth in the economy slowed to a decade low of 1.8% in the March quarter while the jobless rate has ticked up to 5.2% in recent months. Inflation and wages growth have also been more subdued than the bank previously expected.
Lowe said a more flexible labor market meant the economy could sustain a jobless rate down around 4.5%.
“Most indicators suggest that there is still a fair degree of spare capacity in the economy,” he said. “It is both possible and desirable to reduce that spare capacity.”
With this in mind, Lowe said it was important to recognize that monetary policy alone could not do all the work and called for more action on the fiscal front, including spending on infrastructure.
Structural policies that support firms expanding, investing, innovating and employing people would also be welcome.
So far, the newly re-elected coalition government of Prime Minister Scott Morrison has played down the need for fiscal stimulus and remains committed to returning the budget to surplus in 2019/20.
Reporting by Wayne Cole; Editing by Shri Navaratnam