Homeowners can expect further relief in their mortgage repayments in coming months, but it will come at a cost - a rising jobless rate and the outside chance of a recession.
Reserve Bank of Australia (RBA) governor Glenn Stevens said today it would take something "quite surprising" to reverse a likely downward trend in official interest rates.
But economists said the guarded tone of the governor's comments in his twice-yearly appearance before federal parliament's House Economics Committee suggests the central bank will take a cautious approach to cutting rates.
The governor and other central bank officials faced a timely three-hour grilling in Melbourne today, coming in the wake of last week's interest rate cut - the first in almost seven years.
"Unless something quite surprising happens, it seems to me unlikely that we will be reversing course up again in the near term," Mr Stevens said.
He noted financial markets had priced in further rate reductions and that they pointed to a greater than 50 per cent chance of an October cut.
"I don't have any particular agenda today to either persuade them from that or encourage them any further," Mr Stevens said.
But he said it was unlikely that retail banks would volunteer a reduction in rates independently of any central bank move, because their long-term funding costs were still rising.
Subdued domestic demand, and falling oil and food prices, should bring inflation down, but not before the consumer price index spikes to 5.0 per cent when the September quarter inflation report is released next month.
The CPI is expected to return to its two to three per cent target by 2010.
The Reserve Bank is also sticking to an economic growth forecast of just two per cent by year-end, less than half of that seen in 2007.
But there will be job losses as a result of the slowdown in the next year or so and similar to that seen in 2001, Mr Stevens said.
"Unemployment (then) rose a percentage point ... that sort of episode is what we're experiencing now," he said.
His comments coincided with new data showing employers have further wound back their hiring intentions.
The latest ANZ monthly job advertisements series found the total number of job ads fell 4.9 per cent in August - the largest monthly drop since February 2001 and the fourth consecutive monthly decline.
"If this weakness in job advertisements flows through into rising unemployment in 2009, there will be greater scope for interest rate reductions next year," ANZ head of economics Warren Hogan said.
Mr Stevens also could not rule out the economy falling into recession.
"Is there a zero risk of recession? No, it's not zero but the most likely one is the one in the published outlook," he said.
But he did not believe that business confidence was as weak as the 1991 recession, and said that the central bank board members - who come from various walks of the business world - had not spoken at all about a collapse in confidence.
"Perhaps they should get out more, governor," quipped committee member Steven Ciobo, the opposition's spokesman for small business.
Mr Stevens defended the decision to raise rates twice this year given the information it had at the time.
"I think the likelihood that we were going to credibly sit through one bad CPI, then another, then a third, and there is actually a fourth coming that still won't look too good, and not respond at all, I think that was pretty unlikely," Mr Stevens said.
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