The Reserve Bank governor says the chance of an interest rate cut is now “more evenly balanced” with the prospect of an increase as the RBA assesses the fallout from Sydney and Melbourne house price falls.
In a speech to reporters at the National Press Club in Sydney, RBA governor Philip Lowe noted there were many more risks to both the global and Australian economic outlook.
This prompted the RBA to tweak its outlook for interest rates, which have been on hold at a record low of 1.5 per cent for 27 consecutive Reserve Bank board meetings.
“Looking forward, there are scenarios where the next move in the cash rate is up and other scenarios where it is down,” Dr Lowe said.
“Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced.”
Dr Lowe clarified during questioning that whether interest rates next rose or fell was basically a line-ball call.
“There are two scenarios basically and they seem equal — roughly equal — to me,” he responded.
“Is it 50/50 or 55/45? I don’t want to comment on that because our crystal ball is not clear enough to tell that.”
The change in attitude towards interest rates comes amid a steady flow of disappointing economic data over recent months, which has prompted the Reserve Bank to slightly lower its forecast for Australia’s economic growth to 3 per cent this year and 2.75 per cent in 2020.
That is despite Dr Lowe saying he expected a rebound from particularly weak GDP numbers in the September quarter when the December figures come out.
“This type of growth should be sufficient to see further gradual progress in lowering unemployment,” he added.
‘Inevitable’ housing correction
Dr Lowe said there were a number of factors supporting Australia’s economy, but house price falls and weaker consumer spending were the main domestic economic risks.
“The Australian economy is benefiting from strong growth in infrastructure investment and an upswing in other areas of investment. The labour market is also strong, with many people finding jobs,” he noted.
“This year, we will also benefit from a further boost to liquefied natural gas (LNG) exports. The lower exchange rate and a lift in some commodity prices are also assisting.
“Against this generally positive picture, the major domestic uncertainty is the strength of consumption and the housing market.”
On the housing market, Dr Lowe anticipated further price declines in the nation’s two biggest cities because values had risen too far, but acknowledged the RBA was not very good at predicted future house price moves.
“It was the correction that I think became inevitable,” Dr Lowe said.
“I think it is likely that we will see further price declines in Sydney. The rental vacancy rates are rising and rent rates are low. Our prices got to very, very high levels and so some further adjustment would not surprise me, but I think it is manageable.”
However, Dr Lowe put a positive spin on house price declines, noting they were improving affordability for prospective first home buyers.
“We have moved almost seamlessly from worrying that prices were going up, to worrying that they are going down,” he argued.
“The previous trends in debt and housing prices were becoming unsustainable and some correction was appropriate.
“We recognise that this correction will have an effect on parts of the economy. But our economy should be able to handle this, and it will put the housing market on a more sustainable footing.”
RBA counts on wage rises to offset falling house prices
The Reserve Bank is pinning its hopes on continued strength in the jobs market to lead to bigger pay increases that would help underwrite consumer spending.
“Through our discussions with business we are also hearing more reports of firms finding it difficult to find workers with the necessary skills. In time, this should lead to larger wage rises. This would be a positive development,” Dr Lowe said.
“Over the next year, we are expecting a pick up in household disposable income to provide a counterweight to the wealth effects of lower housing prices.”
When asked where these jobs were coming from — given a looming decline in residential construction employment, a peak in infrastructure spending and weakness in the retail sector — Dr Lowe held business investment out as the great hope.
“Private business investment is expected to increase,” he answered.
“We kind of tend to forget but, before Christmas, the latest capital expenditure survey by the ABS showed firms planning to increase their capital spending and we certainly hear that in our liaison program when we talk to businesses.
“They are operating at a higher level of capacity than they have for quite some time and they want to invest. Interest rates are low, largely banks are prepared to lend to businesses and capacity is tight. So they are prepared to invest and that creates jobs.”
Dr Lowe also noted that job vacancies were at a record high, but acknowledged there was a risk the labour market could weaken as construction jobs were lost in the residential building downturn.
“There are other scenarios as well, and you can’t rule those other scenarios out,” he concluded.
China ‘at the top of the list’ of risks
While falling home prices might be causing the Reserve Bank some consternation, Dr Lowe indicated it was the possibility of a hard landing for China’s economy that posed the biggest single threat to Australia.
“If we are to have a significant downturn in the economy I think the catalyst would be something going wrong in the global economy,” the RBA governor said.
“So that would be number one, and China would be at the top of that list.
“If the Chinese economy stumbled and the authorities didn’t manage the tightening up in credit well and the Chinese economy slowed, then that would hurt us a lot.
“Of the domestic sources of risk the housing market-consumption nexus is the most prominent one, but not more prominent than the overseas risks.”
One risk that has been averted, according to Dr Lowe, is an over-reaction to the banking scandals exposed by the royal commission in Kenneth Hayne’s final report, released on Monday.
Dr Lowe welcomed the report, noting it should end some of the uncertainty that had seen some banks become conservative in granting loan approvals.
“The commission’s recommendations that bear on credit provision are balanced and sensible, and should remove some uncertainty,” Dr Lowe observed.
“I think what we needed here was fairly far reaching reform, not revolution, and that’s exactly what we got.”
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