RBA governor Dr Philip Lowe, right, and committee chair Tim Wilson MP, as he addresses the House of Representatives Standing Committee on Economics at NSW State Parliament in Sydney on Friday, February 22, 2019. Picture: Dean Lewins/AAP
RBA governor Dr Philip Lowe, right, and committee chair Tim Wilson MP, as he addresses the House of Representatives Standing Committee on Economics at NSW State Parliament in Sydney on Friday, February 22, 2019. Picture: Dean Lewins/AAP

RBA will cut rates if economy falters

AUSTRALIA'S central bank has the "flexibility" to cut interest rates if the economy falters this year and workers start losing their jobs.

But that's not a foregone conclusion, and the Reserve Bank of Australia doesn't see monetary policy shifting in the "near term", which includes the period leading up to the federal election.

While RBA Governor Philip Lowe agrees the bank's growth outlook is "not as positive" as it was last year, "the central scenario is a positive one".

"With monetary policy already providing considerable support to the Australian economy, it is appropriate to maintain the current policy setting while we assess developments," he told a federal parliamentary hearing on Friday.

"Much will depend on what happens in our labour market."

Dr Lowe notes that if the unemployment rate, which is currently at 5 per cent, declines there may be a case for a higher interest rate. He also agrees that if the national economy softens, and unemployment rises, the case for a rate cut increases.

"We have the flexibility to do this if needed. We are not on a predetermined course," Dr Lowe told the hearing in Sydney.

Financial markets are generally more bearish and some retail banks are factoring in the prospect of at least one interest rate cut this year. The RBA's key cash interest rate remains at a historic low of 1.5 per cent, where it has been since August 2016.

Westpac economists think the central bank will cut the key cash interest rate as many as two times this year by a total of 50 basis points, which would bring it down to one per cent.

This scenario is based on a much softer pace of growth this year of about 2.2 per cent, compared to the RBA's forecast of three per cent.

But other bank economists, like those at National Australia Bank, think rates will remain unchanged for the rest of this year.

Asked about the starkness between the two different outlooks, Dr Lowe said "everyone is entitled to their own view".

"There are a lot of different scenarios," he told the committee. "The probability of rates going up and down are broadly balanced."

While the jobless rate could fall to around 4.75 per cent "over the next couple of years", the RBA is still banking on a rate of around five per cent this year, alongside growth of 3 per cent and inflation of about 2 per cent.

"In the broad sweep of our economic history, this is not a bad set of numbers," Dr Lowe said.


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