By Swati Pandey and Colin Packham
SYDNEY/CANBERRA (Reuters) – Australia’s central bank considers the risk of further cutting rates far outweighs the benefits, Governor Philip Lowe said on Friday, a sign monetary policy is on hold barring a steep rise in unemployment.
The Reserve Bank of Australia (RBA) held its benchmark cash rate at an all-time trough of 0.75% at its first meeting of the year this week and indicated the threshold to go lower was high for now.
On Friday, Lowe said further cuts to interest rates could encourage more borrowing by households eager to buy residential property at a time when housing debt was already sky high.
“If people borrowed too much now it could introduce a vulnerability that could come back to hurt us,” Lowe said in an appearance before parliament’s economics committee in Canberra.
“While it’s plausible that we can move toward our goals, at least right at the moment the risks have slightly tilted to outweigh the benefits,” he added.
“But that could turn, particularly if the unemployment rate deteriorates.”
The governor said a recent upswing in housing prices, following a two-year downturn, has been positive for household balance sheets but reminded lawmakers that “we cannot have too much of a good thing.”
“We could get more help from lower interest rates… but are the risks acceptable?” he said.
Helping the RBA’s case, the unemployment rate improved to 5.1% in successive months in December while last week’s data showed fourth-quarter inflation ticked higher too.
Lowe noted these were positive developments while rising home prices are also expected to support consumption growth in the quarters ahead.
FIRES AND VIRUS
In the near-term though, a devastating bushfire season and the coronavirus outbreak in China have darkened the outlook.
Lowe warned of “significant uncertainty” from coronavirus and its hit to Australia’s A$2 trillion ($1.3 trillion) economy, which could be larger than the 2003 SARS epidemic.
The RBA also released its updated economic outlook on Friday in which it slashed its economic growth forecast for the year to June 2020 to 1.9%, down from a previous prediction of 2.6%.
Yet, it expected rebuilding following the bushfires to boost growth in the second half of the year. As a result, the economy is seen expanding at 2.7% by the end of this year and 3.0% by the close of 2021.
Even so, inflation is not seen hitting the mid-point of the RBA’s 2-3% range over its forecast horizon. It will hug the bottom of its range only by mid-2022.
Lowe said it was not practical to get inflation back at the mid-point next year using monetary policy. He also said quantitative easing (QE) or balance sheet expansion was not on the agenda at the moment.
“There is no doubt that the raft of RBA communication this week challenges our base case forecast for one more cut this year in June and another move to 0.25% and QE in Q1 2021,” RBC economist Su-lin Ong said.
“A more patient RBA was emerging…earlier and more quickly than we anticipated,” she added. “The risk is for our June cut to slip into H2 with a more drawn-out path to terminal cash of 0.25%.”
(Additional reporting by Wayne Cole in SYDNEY; Editing by Chris Reese and Sam Holmes)