Reserve Bank 'prepared to do unconventional things'

The head of the Reserve Bank has told Parliament that all options are on the table to stimulate Australia's economy, potentially even cutting interest rates to zero or negative levels and implementing unconventional policies such as quantitative easing.

This week, four countries - New Zealand, India, Thailand and the Philippines - cut their official rates, with more nations expected to follow over the next few weeks.

That follows the first US Federal Reserve rate cut in more than a decade at the end of July. RBA governor Philip Lowe told the House of Representatives Standing Committee on Economics that the bank may have to cut rates again if unemployment rises and inflation remains weak.

"It's possible we end up at the zero [rate] lower bound. I think it's unlikely but it is possible," he said. "We're prepared to do unconventional things if the circumstances warranted it."

The Reserve Bank has recently faced criticism from the committee's chairman, Liberal MP Tim Wilson, as well as former prime minister John Howard.

However, Dr Lowe defended the RBA's decision to slash Australia's interest rates to a fresh record low of 1 per cent last month. "If we didn't have the level of interest rates we have today - let's say they were 1 percentage point higher - I'm confident the exchange rate would be higher," he said.

"That would be hurting our agricultural sector, our miners, our tourism sector, the education sector."

The chance of further interest rate cuts appears very high following the release of the Reserve Bank's latest quarterly Statement on Monetary Policy (SOMP) this morning.

Reflecting the reality of the economic data flowing in, the Reserve Bank has downgraded its economic growth predictions once again, even though the forecasts assume market pricing for interest rates, which is currently factoring in another rate cut this year plus one more next year, taking the cash rate down to just 0.5 per cent.

Despite these assumed rate cuts, the RBA has lowered its GDP forecast from 2.75 to 2.5 per cent for the year to December 2019.

However, it has lifted the June 2021 forecast from 2.75 to 3 per cent. A key reason for the RBA lowering its short-term domestic economic forecasts is a high, and rising, degree of uncertainty about when Australian households will open their wallets again - despite lower interest rates and tax cuts. "The outlook for consumption more broadly continues to be the main uncertainty facing the domestic economy, especially in the context of ongoing high levels of household debt," the bank's staff noted in the report.

The central bank also raised its unemployment forecast from 5 to 5.25 per cent for this year and next.

Furthermore, the jobless rate is now not expected to fall below 5 per cent out to the end of the forecast period (December 2021).

That leaves the proportion of people out of work higher than the bank's new estimate of full employment (4.5 per cent) as far as the eye can see.

Consequently, wages growth is expected to remain stuck around its current low levels of 2.3 per cent for the next couple of years, in contrast to the improving situation for workers in many other advanced economies.

"Wages growth increased notably over 2018 in the major advanced economies and remains around the highest levels since 2010," the RBA noted. With wage growth remaining subdued and consumers remaining cautious, the Reserve Bank now expects it to take an extra year to get inflation back to even the bottom of its target range, forecasting a return to 2 per cent annual price increases by June 2021.

Considering these lower forecasts - with many slashed again for the third consecutive SOMP - it is not surprising the bank has indicated strongly that interest rates are far more likely to fall over the next year or so than they are to rise.

"Given the current environment, it is reasonable to expect that an extended period of low rates will be needed to achieve the board's employment and inflation objectives," the RBA noted.

"The board will continue to monitor developments in the labour market closely and is prepared to ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time."