Ross Greenwood speaks to St George’s chief economist Besa Deda after a slowing Australian economy may force the Reserve Bank to lower interest rates, to help deal with any headwinds.
Ross Greenwood: Let’s go to today some of the things that Philip Lowe, the governor of the Reserve Bank had to say in regards to the economy because he’s tipping here almost that they’re sitting on a knife-edge could go either way. Interest rates could go up if one thing happens or down if the other thing happens.
Philip Lowe: It is possible that the economy is softer than we expect and that income and consumption growth disappoint. In the event of a sustained increase in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point. We have the flexibility to do this, if needed.
Ross Greenwood: I could accept that’s what he said there. Now, I must admit that I asked him about the fact that interest rates have been flat for 30 months now and because they’ve been flat for 30 months, now, is it a situation that banks now raise interest rates and as a result do they then control the leaders of the economy and not the Reserve Bank. Well, here was his response to that one.
Philip Lowe: In terms of the effectiveness of further interest rates cuts, if we needed to do that, I’m confident that lower interest rates would stimulate the economy if that was what was needed, primarily through two channels. One is what we call the cash flow channel because Australian households have net debt obligations and lower interest rates give them more money in their bank accounts each week, and they would spend some of that and that would help stimulate the economy. The other channel is through a lower exchange rate. If we were to lower interest rates, I’m sure there’d be an exchange rate response and that would change the outlook in the trade sector. I’m not concerned that having left the cash rate for so long at the current level we’ve left monetary policy to the banks.
Ross Greenwood: He’s confident that they have not left monetary policy to the banks, that they still have a firm hand on the economic tiller. Let’s now go to the St. Georges Chief Economist Besa Deda, who was at that lunch today, listening to the Reserve Bank governor. Besa, did you sense a change of tone from the Reserve Bank today?
Interview with: Besa Deda, Chief Economist, St George
Besa Deda: Well, we did in the sense that they shifted the bias to a neutral bias. Whereas last year, they thought it was more likely that the cash rate would go up as the next move, they now see it as equally likely as going up or going down. Sitting on the fence, if you like. In terms of the RBA being hopeful of the economic growth outlook, I still think that remains the case although the RBA governor I think did seem more uncertain about the outlook and rightly so because the downside risk in the global economy have grown and the downturn in the housing market in Australia has deepened.
Ross Greenwood: Think about that downturn in the housing market that it’s deepening and he did indicate today that he believes in particular Sydney house prices could continue to fall. But, of course, many attribute these to some form of a credit squeeze. What did you sense that he was trying to tell people when it came to whether there is a credit squeeze and whether the banks have the ability to lend more if they want to?
Besa Deda: I think he was trying to explain what produced the downturn in house prices. He ran through four case factors which included, greater housing supply, it included the softening of foreign demand. I think he made the point that he sees the downturn as being manageable and the economy being able to withstand it because it wasn’t brought about by higher interest rates from the RBA or tighter monetary policy and it wasn’t brought about by high unemployment but by structural factors.
Interesting in the Q$A session, he answered a question and in that answer, he said that house prices a very difficult to model. I think that comes back to the big uncertainty about the outlook in the domestic economy is consumer spending and the wealth impact from house prices.
Ross Greenwood: Just a dumb question, Besa, and that is if the Reserve Bank governor who does have his hands on the economic levers can’t work it out as to which way it’s going to go, how does the rest of us work it out?
Besa Deda: It makes it hard but things have really shifted in the last two months. I think it’s right that the RBA just sits still and takes time to really assess the data and see if there’s really a trend forming and that is because in the global economy you’ve seen a US government shutdown earlier this year, we can’t rule out another one, Brexit still unresolved, Italy’s gone into recession. Of course, you’ve got the ongoing US trade war.
He did highlight that the biggest downside risks were coming for the global economy but then domestically the biggest uncertainty is the consumer. The RBA is betting on jobs growth remaining firm and that’s been leading to a lift in household income growth and that’ll be what’s in the spotlight, the labor market and what that will mean for wages growth.
Ross Greenwood: Yes, because he did very much talk about wages growth quite a lot and said that he does believe if there is competition for jobs by employers that ultimately that will lead to wages growth, and he says that is certainly the hope that they would imagine should come to bear which could ultimately leave the next move in rates being up and not down. Besa Deda is the chief economist with St. Georges Bank and, Besa, as always, I appreciate your time.
Besa Deda: Thank you, Ross.
Image source: 2GB