Even lower rates are on a way – says Governor Lowe

Lowe said in May that while the Reserve Bank had long thought an unemployment rate of 5% was the best that could be achieved without generating worrying inflation, that view has now changed:

From today’s perspective, I think we can do better than this. My judgement of the accumulating evidence is that the Australian economy can support an unemployment rate of below 5% without raising inflation concerns.

The Reserve Bank should be able to cut interest rates until unemployment fell below 5% and approached 4.5% without worrying about inflation, Lowe argued.

It would likely be appropriate to cut interest rates and keep cutting until the unemployment rate was driven below 5%, continuing to cut until it approached 4.5%.

It is reasonable to conclude that the Reserve Bank will keep cutting rates until unemployment does fall below 5%. In other words, it will keep cutting rates until 2021.

The Reserve Bank’s quarterly forecasts update countenances that happening. As foreshadowed by the governor, it forecasts that the unemployment rate won’t fall back to 5% until June 2021.

FORECASTS

  • Economic growth of just 2.5% in 2019 down from a previously forecast 2.75%
  • Very weak inflation this year of just 1.75%, down from a previously forecast 2%
  • Another cut of 0.25% in October
  • And then another cut of 0.25% in February 2020, taking the cash rate down to yet another all-time low of just 0.5%
Two more cuts in its cash rate will take it to 0.5%, close to zero

Lowe revealed that the Reserve Bank is investigating so-called “unconventional” monetary policy or quantitative easing that would have the same effect as taking the cash rate below zero.

Rates might go to zero, or below, worldwide because right now there is a worldwide trend of savings, and not enough investments.

The reality we face is that, if a lot of people want to save and not many people want to use those savings to build new capital, savers are going to get low returns. We can move our interest rates around this new structurally lower level, but we can’t escape the fact that global interest rates are low.

Conclusion

Lowe doesn’t believe further interest rate cuts would to do much to encourage businesses to invest, or to encourage home buyers to borrow, but he is certain they will help in other ways.

They will lower the exchange rate, making Australian goods and services more competitive, and that they will free up the cash of Australians who already have home loans, what he calls the “cash flow” channel.

*source Property Observer

Posted in Buy, Latest news, News, Sell on 12th August, 2019