Reserve Bank governor Philip Lowe has hinted at the prospect of a third rate cut this year amid sluggish economic growth and global market uncertainty.
“The board is prepared to ease monetary policy further if needed to support sustainable growth in the economy, make further progress toward full employment, and achieve the inflation target over time,” Lowe said in a speech to the Armidale Chamber of Commerce.
While another rate cut would most likely buoy equities and please borrowers, Citigroup recently warned that it could severely impact retirees and cash-only investors who depend on interest income, with many investors turning to bonds in order to secure their profits.
Mr Lowe’s comments come as Australian economic growth continues to cool in line with a global slowdown. Australian GDP has grown by only 1.4 per cent over the last year, its slowest pace in over 20 years. The RBA flagged weak consumption growth as one of the reasons for the slow pace of GDP growth in Australia.
There has been little consumption growth in Australia over the past year despite steady employment growth, which Mr Lowe blamed in part on low growth in household income.
“The persistence of slow growth in household income has led many people to reassess how fast their incomes will increase in the future. As they have done this, they have also reassessed their spending, particularly on discretionary items, which has been quite weak over recent times,” he said.
Homeowners are also holding onto their homes longer due to falling house prices, which the Reserve Bank governor said had resulted in less spending on moving costs, real estate fees, furniture and appliances for new homes. This has also had an impact on residential construction activity.
However, Mr Lowe forecasts a pick-up in household disposable income from larger tax refunds, suggesting that at least half of those tax refunds will be spent over the coming quarters.
“Household disposable income is also being boosted by lower interest rates, although the effect is uneven across the community, with lower rates reducing the income of those households who rely on interest income,” Lowe said.
Despite sluggish GDP growth and global geopolitical uncertainty, the RBA remains hopeful that the Australian economy will continue to grow in the near future.
“Australia is fortunate in having enviable endowments of natural resources, both in terms of minerals and agricultural land. We have a reputation as a highly reliable supplier and a producer of high-quality clean food. We also have close links with the rapidly growing countries of Asia.”
Mr Lowe’s comments come after DWS chief investment officer for APAC, Sean Taylor, compared Australia’s strong economic position to overseas markets.
“From an Australian basis, you’re actually in a really good position because you have something on deposits. Sure, you might have a few more interest rate cuts to bring deposits down to 50 basis points, but you’ve got 1 per cent yield on treasury and a 1.5 to 2 per cent on corporate and a pretty healthy dividend yield still after the market has gone up on equities,” the Hon-Kong-based fund manager told Investor Daily.
“That’s not a good situation in Australia compared to what it was four or five years ago, but you compare it to Europe where you’ve got negative deposit rates. In some countries in Europe, like Switzerland, you’re actually paying to keep your money in the bank.”