Rising unemployment would trigger rate cut: RBA chief

Bloomberg

Australia’s central bank chief Philip Lowe signalled his board is firmly on hold for now, saying further cuts to the nation’s already historically-low interest rate risk doing more long-term damage to the economy than the short-term benefit they would create.
“While it’s plausible that we can move towards our goals, at least right at the moment the risks have slightly tilted to outweigh the benefits,” the governor told a parliamentary panel in Canberra. “But that could turn, particularly if the unemployment rate deteriorates.”
He warned of “significant areas of uncertainty” including the outbreak of coronavirus in China, the nation’s largest trading partner, and said signs of rising unemployment and stalled inflation would swing the balance back towards rate cuts.
“If the unemployment rate were to be moving materially in the wrong direction and there was no further progress being made towards the inflation target, the balance of arguments would tilt toward a further easing of monetary policy,” he said, in his opening statement to the panel.
The Reserve Bank of Australia kept the cash rate unchanged this week at a record low 0.75% as the labor market holds up and amid resurgent property prices. Lowe cut rates three times last year to boost economic growth and is reluctant to ease further as he fears unleashing a renewed borrowing binge.
Lowe defended the central bank’s rate cuts in recent years, saying it was responding to weakness in the economy, not causing it. “Household confidence is weak because income growth is weak and housing prices have fallen,” he said. “We’re responding to that.”
The central bank’s key concern is consumption, which has weakened as households struggle to come to grips with high debt amid stagnant real wage growth over the past half decade. To date, they’ve used the RBA’s rate cuts to pay down their mortgages faster and saved government tax rebates.
Lowe maintains that this is a normal response and suggests that once Australians have consolidated their financial position, they will resume spending. Household debt has indeed fallen recently from a record high.
The governor’s other key challenge is to push the jobless rate down sufficiently to spur wage growth and rekindle inflation, with a level of 4.5% seen as needed rather than the current 5.1%. While the economy has recorded strong employment over the past three years, it has mainly been absorbed by a swelling labor force.
All this comes against the backdrop of a disastrous summer of drought and wildfires that smashed tourism and consumption as land and wildlife were incinerated and cities inundated with acrid smoke.
The RBA estimates blazes that devastated Australia’s east coast will cut 0.2 percentage point from GDP across the final quarter of 2019 and first quarter of this year, before reconstruction efforts take hold. The upshot is it’s unlikely to impact overall annual growth.
Compounding this is coronavirus. Australia’s economic fortunes are heavily dependent on the world’s number 2 economy: China buys one-third of Australian goods and services. Halting flights to limit the spread of the virus will strike at the heart of education and tourism, some of the nation’s most valuable exports. A weaker Chinese economy also has less need for iron ore, and the price is tumbling accordingly.
“The outbreak of the coronavirus represents a new source of uncertainty,” Lowe said on Friday, adding that “much will depend on the success of the various efforts to control the virus.” Under questioning from lawmakers, he said the virus posed a greater threat to the Australian economy than the SARs virus almost two decades ago, with reports of disruption to trading supply chains and the tourism industry.