The Reserve Bank of Australia is set to slice interest rates within weeks and follow up with another cut as governor Philip Lowe called on the re-elected Morrison government to spend more on infrastructure and consider industrial relations reforms.
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In a speech to the Queensland branch of the Economic Society of Australia in Brisbane, Dr Lowe said without a cut in interest rates, unemployment across the country was unlikely to fall much further, inflation would remain low and workers would fail to enjoy sizeable wage increases.
Declaring that Australia could "do better" than have an unemployment rate around 5 per cent, he said there were few options for the RBA but to consider a rate cut.
"A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target," he said.
"Given this assessment, at our meeting in two weeks' time, we will consider the case for lower interest rates."
The Australian dollar immediately dropped below US69 while the ASX200 moved into positive territory on hopes rate cuts would buoy the domestic economy.
The RBA last sliced official interest rates in August 2016, when they were cut to 1.5 per cent. Under Dr Lowe's governorship, the RBA has yet to lower the cash rate which is already at its lowest level since 1959.
The bank decided against cutting rates earlier this month in what would have been considered a controversial move so close to the federal election.
But Dr Lowe made clear the RBA believes if unemployment is to get lower then it will need support from the federal and state governments, saying there were a range of options to help cut the jobless rate.
"These include: further monetary easing; additional fiscal support, including through spending on infrastructure; and structural policies that support firms expanding, investing and employing people," he said.
"Relying on just one type of policy has limitations, so each of these is worth thinking about."
Treasurer Josh Frydenberg admitted the economy was facing headwinds but said the Coalition's plans for $100 billion of infrastructure spending over the next decade would boost employment.
"Domestically, we are seeing the impacts of flood and drought as well as a slowdown in the housing market and the implications that that has. But the fundamentals of the Australian economy are sound," he said.
In a sign of the concern about the housing market, the Australian Prudential Regulation Authority revealed it was considering relaxing lending standards, in effect ending a requirement that banks ensure borrowers can withstanding a mortgage interest rate of 7 per cent.
That rate has come under criticism for being out of step with current rates offered by the commercial banks, with many customers paying less than 4 per cent.
NAB senior economist Kaixin Owyong said the changes by APRA would be helpful "at the margin" as most people did not borrow the full amount on offer from banks.
The Commonwealth Bank's economics team said a combination of factors including low inflation now meant the RBA was likely to cut rates next month and follow that up with another in August.
"The RBA are reluctant rate cutters. We have known that for some time. Indeed, the cash rate has not been lowered under governor Lowe," they said.
"However, persistently below-target inflation, below-trend GDP growth and a slight rise in the unemployment rate mean that policy easing now looks imminent."
On a $300,000 mortgage, and if fully passed on by commercial banks, a half percentage point cut in interest rates would save borrowers $86 on monthly repayments.
The RBA's own recently downgraded economic forecasts are predicated on market pricing for interest rates falling to 1 per cent by the end of the year.
- SMH/The Age
