New Reserve Bank governor Philip Lowe has held out hope of further interest rate cuts, saying he needs to guard against inflation expectations falling too far.
In his first speech since taking over from Glenn Stevens as governor in September, Dr Lowe said each of the bank's two rate cuts this year were in response to lower than expected inflation.
More Business Videos
- Video duration
- 03:04
Philip Lowe's first speech as RBA boss
- Video duration
- 01:19
The bank of mum and dad
- Video duration
- 02:05
Don't cry for Packer's Barangaroo
- Video duration
- 02:00
The end of interest rate cuts
- Video duration
- 02:51
Universities, business seek better collaboration
- Video duration
- 01:55
The impact of China's raids on Crown Resorts
- Video duration
- 03:37
Planning for divorce
Philip Lowe's first speech as RBA boss
Hear what the Reserve Bank has to say about inflation, jobs and housing in Philip Lowe's first speech as RBA governor.
"The easing in policy was not in response to concerns about economic growth," he said. "If anything, the growth outcomes over the past year, as measured by real GDP or the trend in unemployment, have been a bit better than expected."
The headline inflation rate is currently 1 per cent, well below the RBA's medium-term target band of 2 to 3 per cent. Over the next two years, it should pick up, although to something "closer to 2 per cent than 3 per cent".
But if it turned down and expectations turned down, there would be a case for cutting rates to bring them back up.
"I am the first governor to have taken office where the concern of the day is more that inflation might turn out to be a bit too low rather than a bit too high," he told the Citi fund managers conference on Tuesday morning.
The unemployment rate and unusually low wage growth afforded him room to cut rates without breaching the top of the inflation target band.
"Bank staff estimate that the current unemployment rate of 5.6 per cent is around half a percentage point or a bit more above full employment. Over the past year, the Australian Bureau of Statistics' measure of underemployment has risen, not fallen," he said.
An examination by the RBAÂ and the ABSÂ showed a decline in the frequency of wage increases and lower actual increases when they occurred.
"Six years ago, almost 40 per cent of the 18,000 individual jobs being tracked received a wage increase in excess of 4 per cent. In contrast, over the past year, less than 10 per cent of jobs got this type of wage increase. And almost half had a wage increase of between 2 and 3 per cent," he said.
While the RBAÂ would take account of the housing market in any decision it made about rates, the state of the market was mixed.
"Prices seem to be increasing quite briskly again in some areas, although are falling in others. Growth in rents is very low and there is a big increase in housing supply still to come," Dr Lowe said.
"To add to the picture, credit growth is still exceeding income growth, although by a smaller margin than last year. It is also noteworthy that much of this credit is being used to finance new housing construction rather than consumption. It is a complex picture."
He would receive an important update on inflation next week with the release of the September-quarter consumer price index.
5 comments
New User? Sign up