RBA Governor Philip Lowe. Picture: Adam Yip
RBA Governor Philip Lowe. Picture: Adam Yip

Australia’s growth forecast revised down

RESERVE Bank Governor Philip Lowe has warned the ongoing trade war between China and the United States poses a "significant risk" to the global and Australian economies.

"We have a lot riding on these disputes being resolved soon," Dr Lowe told a parliamentary committee in Canberra this morning as he outlined the RBA's latest forecasts.

Those forecasts include a prediction that economic growth will be lower than previously expected. The RBA now expects GDP growth of 2.5 per cent this year, rising to 2.75 per cent next year.

Inflation will remain below the RBA's target for some time, and unemployment will stay above 5 per cent.

The upward pressure on wage growth is also expected to be "quite modest".

Dr Lowe blamed the revisions on weak consumption growth at the domestic level and the "major uncertainty" internationally as a result of the trade war.

Reserve Bank Governor Philip Lowe.
Reserve Bank Governor Philip Lowe.

It wasn't all negative. Dr Lowe cited lower interest rates, the recent tax cuts, the depreciation of the dollar, a brighter outlook for resources investment, high infrastructure investment and a correction in the housing market as positive factors for the economy.

"There are signs the economy may have reached a gentle turning point," he said.

When Dr Lowe last appeared before the Economics Committee earlier this year, he told it the chances of the cash rate going up or down were roughly even. Since then, of course, the RBA has lowered the rate twice to a record low of 1 per cent.

"A reasonable question to ask is what changed? And the answer is the accumulation of evidence that the economy could be on a better path than the one we were on," Dr Lowe said this morning.

He justified the decision to lower the cash rate, saying it would "boost jobs and help make more assured progress towards the inflation target".

"I acknowledge that lower interest rates do hurt the finances of many Australians who rely on interest payments," he conceded.

"(But) lower interest rates do put more money in the hands of the household sector in aggregate, and at some point this money will be spent.

"After having moved twice in quick succession, it was appropriate to wait and assess developments both internationally and domestically," he said of the RBA's most recent decision to keep rates on hold this week.

However he left open the possibility that the rate could fall below 1 per cent going forward.

"Concerning international developments could see the economy underperform our central scenario," Dr Lowe said.

"While we might wish it were otherwise, it is difficult to escape the fact that if global interest rates are low, they are going to be low here in Australia too."

Monetary policy is not the only option for boosting the economy. Dr Lowe raised the idea of further spending on infrastructure, or implementing structural policy to support firms expanding, innovating and employing more people."

The committee chairman Tim Wilson.
The committee chairman Tim Wilson.

Dr Lowe's appearance before the committee today comes amid accusations he has "thrown up his hands" and given up on stimulating the economy.

RELATED: Reserve Bank keeps cash rate on hold

Liberal MP Tim Wilson, who chairs the committee, yesterday said it seemed as though Dr Lowe had "said he has exhausted the options of monetary policy".

Mr Wilson indicated he would press Dr Lowe on the wisdom of keeping interest rates at such historic lows.

"There really are a lot of questions they need to answer about their decisions and what they're factoring in," he told the AFR.

"The consistency at times between what their own internal research is showing around the consequences of lower interest rates and the decision to cut interest rates is going to be a pretty heavy focus.

"They're saying publicly at the moment that cutting rates won't increase the amount of debt and house prices, but their own research shows cutting interest rates is the biggest contributor to the volume of household debt and house prices."

The "internal research" to which Mr Wilson referred is a paper called A Model of the Australian Housing Market, which was written by RBA analysts Trent Saunders and Peter Tulip and published in March.

That paper found changes in interest rates were the most significant influence on house prices.

RELATED: Australian dollar falls to 10-year low

The global trend of cutting interest rates continued on Wednesday. The Reserve Bank of New Zealand slashed its own official cash rate by 50 basis points, citing weakened global activity as a result of the trade war between the United States and China.

Shortly afterwards, the Australian dollar plummeted to its lowest level since 2009, when the Global Financial Crisis ramped up.

Earlier this week, former prime minister John Howard warned the RBA may have already cut interest rates "too far", leaving Australia lacking ammunition in the event of another global shock.

Speaking to the ABC, Mr Howard said he was "not sure that these interest rate cuts have been the right thing to do".

"But I don't think my advice will be taken. A number of reasons why we came through the GFC so well is that our interest rates were higher when we entered the GFC and the central bank had room to move".

"If you cut them too far you get rid of all that petrol in the tank. If something unexpected comes along, you don't have the same room to manoeuvre. It's a point of view, and I'm not claiming any special expertise, but I think we've gone quite far enough and perhaps too far."

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