Cash rate to stay low despite robust economy — RBA

By Gerv Tacadena

The Reserve Bank of Australia is open to taking the official cash rate even lower than the current record level of 1%.

The Reserve Bank of Australia is open to taking the official cash rate even lower than the current record level of 1% to stimulate further growth in the economy, central bank governor Philip Lowe said.

Australia's economy remains strong, and Lowe said the recent back-to-back rate cuts, the reduction in tax rates for low- and middle-income earners, higher commodity prices, and the stabilisation of housing market are expected to support the economy further.

However, the problem lies in the number of Australians who are unemployed. Lowe said there is an increase in older workers and new parents which inflated the jobs market.

"Older Australians and women have stayed in the workforce much longer than ever before. Dare I say it's almost a structural change which is partly driven by demand for labour and other things in society, but there are more options now to return to work," Lowe said.

Should growth drivers fail to ease the high joblessness rate, Lowe said the central bank is ready to take rates lower.

"It remains to be seen if future growth in demand will be sufficient to put pressure on the economy's supply capacity and lift inflation in a reasonable timeframe. It is certainly possible that this is the outcome. But if demand growth is not sufficient, the board is prepared to provide additional support by easing monetary policy further," he said.

Lowe said that the RBA did not consider cutting cash rates earlier than June due to the assumption that the unemployment situation would improve, which, in turn, would boost wages and lift inflation back to the bank’s targets.

He said the sharp increase in the labour market's participation rates, particularly among older Australians, has impacted the pressure on wages.  The number of Australians aged 65 and above in the labour market has grown by 25% in the last two years.

With the uncertainties in the labour market, a 0.5% cash rate might be in the cards, Westpac chief economist Bill Evans said earlier this week.

"Our forecasts for inflation and unemployment emphasise the extent of the challenge faced by the RBA in boosting demand and wages and reaching their own targets. We expect that the RBA will eventually see only one more rate cut, in October, as being an insufficient response," he said.

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