RBA Governor Signals a Cash Rate Cut

The Australian Reserve Bank signaled that is aiming for a rate cut. In a speech to economists in Brisbane, the bank governor Philip Lowe claimed that the Australian Reserve Bank decided on its last meeting that inflation won’t come back to its 2 to 3 percent target unless there is a fall in unemployment levels.

Since unemployment rose from a low of 4.9 to 5.2 percent according to the last labor market data, Lowe suggested that a higher interest rate would help to fix the unemployment problem and to keep inflation that is “consistent” with the target.

“A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target,” said Lowe, “given this assessment, at our meeting in two weeks’ time, we will consider the case for lower interest rates,” he added.

Earlier this month, the Reserve Bank of Australia (RBA) signaled future rate cuts, as they adjusted their growth forecast from 2.5 to 1.7 percent for the first semester of this year and foresaw a rebound for the second half of this year, going back to 2.6 percent. To make their projections they took into account the idea of raising the cash rate.

“If instead, we had used an assumption of unchanged interest rates, the growth forecast would have been lower and the forecast for unemployment would have been higher,” said Lowe.

Lowe attributed the economic slowdown to a weak household income and spending, however, he said the bank is expecting a “gradual improvement.”

“This is largely on the basis of an expected pick-up in growth in household income, and a stabilization of the housing market over the period ahead,” he said, despite discarding a quick turnaround in consumer spending and economic growth.

It’s very likely the next RBA meeting will result in a rate cut since it’s not common for them to announce in an explicit way that they will discuss lower interest rates. The next meeting is expected to happen on June 4.