In his first speech of 2020, RBA Governor Phillip Lowe has reiterated that interest rates will likely remain low for an extended period of time while cautioning on their impact on house prices.
Speaking at the National Press Club, Dr Lowe came out strongly by suggesting three interest rate cuts last year had been of benefit to the Australian economy, which would have been far worse off had they not occurred.
Only yesterday, the RBA left official interest rates at 0.75 per cent, however, Dr Lowe also left plenty of room for more cuts if they are required.
“I hear frequently the Reserve Bank’s decision to cut interest rates last year dented consumer confidence and that this is what lies behind the weak consumption growth,” Dr Lowe said.
“My judgement is that if the Reserve Bank had not eased monetary policy last year, this adjustment by households would have been harder, the balance sheet repair would have been more difficult, and the economy would have been weaker.
“I certainly understand that having interest rates at very low levels has unsettled some people. But I don’t accept the idea that this is what is driving weak consumption. There is something deeper going on.”
Dr Lowe also made it clear that the RBA will continue to watch the state of both employment and inflation when assessing any further cuts.
“If the unemployment rate were to be trending in the wrong direction and there was no further progress being made towards the inflation target, the balance of arguments would change. In those circumstances, the board would see a stronger case for further monetary easing,” he said.
Housing bubble
During the speech, the RBA governor let it be known that he was closely watching house prices, particularly in Sydney and Melbourne, which are currently growing at 10 per cent annually.
Dr Lowe was concerned that the low interest rate environment could lead to ‘too much of a good thing’.
“The lower interest rates have assisted with both sides of the balance sheet. They have allowed people to pay down their liabilities more easily, and they have also boosted asset prices,” he said.
“So they are helping, not hampering, the process of balance sheet adjustment. In doing so, they are also bringing forward the day when households feel comfortable to lift their spending again.
“We need to remember that it is possible to have too much of a good thing. We are aware of the risk of low interest rates encouraging too much borrowing and driving excessive asset valuations. So we will continue to watch borrowing, in particular, very carefully.”
Impact of fires
Dr Lowe also made it clear that there would be an impact on the economy due to the recent bushfire crisis and he encouraged businesses to keep on spending in a boost to lift GDP.
Dr Lowe believed the ‘Australian economy would expand by 2¾ per cent over 2020 and 3 per cent the following year’.
He also felt the long-term impact of the bushfires would be minimal.
“In assessing the impact of this on the Australian economy as a whole we have taken into account that there will be a material rebuilding effort and that government grants and insurance payments will assist many people,” he said.
“On this basis, our assessment is that GDP growth for 2020 as a whole will be largely unaffected.”
Coronavirus fears
Dr Lowe also suggested it was too early to tell if the coronavirus outbreak would have any meaningful impact.
“It is too early to tell what the overall impact will be, but the SARS outbreak in 2003 may provide a guide,” he noted.
“On that occasion, there was a sharp slowing in output growth in China for a few months, before a sharp bounce-back as the outbreak was controlled and economic stimulus measures were introduced.
“Today, China is a larger part of the global economy and it is more closely integrated, including with Australia, so the international spillovers could be larger than they were back in 2003.
“Much will depend on the success of the various efforts to control the virus so we are monitoring developments closely.”
