Australia cuts interest rates to record low as global risks mount

Australia's Reserve Bank has cut interest rates for the third time this year.
Australia's Reserve Bank has cut interest rates for the third time this year.PHOTO: REUTERS

SYDNEY (BLOOMBERG) - Australia's central bank was dragged further into the global easing tide as it cut interest rates for the third time this year on Tuesday (Oct 1), even as it risks refuelling excesses that governor Philip Lowe warned against just weeks ago.

The Reserve Bank reduced the cash rate by 25 basis points to a record-low 0.75 per cent and said it may ease even further, venturing deeper into levels where unconventional measures may need to be adopted. The move is in part designed to prevent a rebound in the depreciating currency that might have been triggered if it stood pat while global counterparts eased.

"The global race to the bottom is, in a sense, dragging the RBA along," said Michael Blythe, chief economist at the Commonwealth Bank of Australia. "Failure to participate could see the Australian dollar move higher."

Global risks from the US-China conflict to Hong Kong riots have forced Lowe to tilt from a stubborn focus on financial stability that defined the start of his tenure three years ago. Only in August, he was warning global policymakers at the Jackson Hole symposium that easier monetary conditions will "push up asset prices, which brings its own set of risks".

Lowe's fears were confirmed locally just hours before Tuesday's decision, with data showing the RBA's June and July cuts had reawakened Australia's dormant housing market at a time households are already saddled with near-record debt levels. Prices rose the most since March 2017, led by hot spots Sydney and Melbourne.

"The board took account of the forces leading to the trend to lower interest rates globally and the effects this trend is having on the Australian economy and inflation outcomes," Lowe said in his statement on Tuesday. It "will continue to monitor developments, including in the labor market, and is prepared to ease monetary policy further if needed."

The Australian dollar declined, trading at 67.06 U.S. cents at 4:15 p.m. in Sydney, compared with 67.48 cents before the decision.

Tuesday's cut is also designed to give maximum kick to a "gentle turning point" that Lowe says he sees in the economy following a year of weak growth. The governor is similarly trying to stem unemployment - which climbed to 5.3 per cent in August as a swelling labour force overwhelmed an increase in hiring - and bolster consumer confidence in order to revive household spending.

 
 

"Forward-looking indicators of labour demand indicate that employment growth is likely to slow from its recent fast rate," Lowe said. "The economy still has spare capacity and lower interest rates will help make inroads into that."

Lowe wants to stoke the local economy hard to try to ensure its resilience. At 0.75 per cent, the cash rate is close to the lower bound that he and deputy governor Guy Debelle estimate is around 0.25 per cent-0.5 per cent. Both have previously said they don't expect to have to turn to bond buying and other alternative measures, as they wait and gauge the success of existing stimulus.

"The Reserve Bank is likely to cut again early next year," said Callam Pickering, economist at global jobs site Indeed. "Bank officials are reluctant to discuss quantitative easing but it becomes a real possibility the closer we come to a cash rate of 0 per cent."