SYDNEY-The Reserve Bank of Australia won’t be overly doctrinaire in enacting policy around its 2%-3% inflation target, its new governor told parliament Thursday.
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“But we think it will take longer for the RBA to realise that the outlook for inflation is weaker than it now believes, which is why we think rates are more likely to fall below 1.5% next year”, added Capital Markets chief Australian and New Zealand economist Paul Dales.
Later, in response to questions, Lowe said it was “not particularly useful” to keep cutting interest rates in the hope that it will eventually work.
“So certainly there’s a scenario where rates would fall again, there are scenarios where they wouldn’t need to fall again”.
Dr Lowe defended keeping the long-standing inflation target of two to three per cent, saying it had served Australia well, as low and stable inflation remains an important precondition for strong and sustainable growth in employment and incomes.
Dr Lowe said the economy is adjusting “reasonably well” to transition out of the mining investment boom and that Australia has dodged the worst of the global downturn. “This assumes that the Q3 CPI will show underlying inflation broadly in line with the RBA’s forecast trajectory, where we think a solid downward surprise would be required to prompt another rate cut.” said ANZ in a report.
Looking to the U.S. presidential elections and their potential ramifications, Dr Lowe said a win by Donald Trump would be a surprise to many in financial markets.
Dr Lowe says as an optimist he’s chuffed that the sole item his predecessor Glenn Stevens left for him in his office earlier this week was a coffee mug emblazoned with the words “half full”.
Lowe, who took charge at the RBA this week, inherited an economy with interest rates and wage growth at record lows, reflecting anemic inflation.
The Fed’s decision followed one by the Bank of Japan to continue loosening its policy while limiting the impact of low rates on financial institutions.
Mr Blythe believes the Reserve Bank is reluctant to cut interest rates further for a range of reasons.
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Dr Lowe has taken over as head of the RBA amid a period of slower economic growth, ultra-low inflation and high levels of debt, and with central banks’ effectiveness under scrutiny.
