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RBA makes the case for more interest rate cuts – 20 June 2019

Australian Financial Review

Reserve Bank governor Philip Lowe said a much more aggressive easing policy was needed to achieve higher employment growth because the data suggested “we are not making significant inroads” in absorbing spare capacity.

Dr Lowe said more interest rate cuts on top of the first move in almost three years, on June 4, would be needed to reduce unemployment and get inflation back to a more comfortable level.

“It is not unrealistic to expect a further reduction in the cash rate as the Board seeks to wind back spare capacity in the economy and deliver inflation outcomes in line with the medium-term target,” Dr Lowe told the Committee for Economic Development of Australia in Adelaide on Thursday.

“It would, however, be unrealistic to expect that lowering interest rates by 0.25 of a percentage point will materially shift the path we look to be on.”

“The most recent data – including the GDP and labour market data – do not suggest we are making any inroads into the economy’s spare capacity,” he said.

He said the interest rate cut decision earlier in the month “reflected a judgment that we could do better than the path we looked to be on” and that the Australian economy could sustain a higher rate of employment growth and a lower unemployment rate “than previously thought likely”.

“We remain short of the unemployment rate associated with full employment.”

The central bank has estimated that unemployment needs to fall below 4.5 per cent – possibly even lower – to see inflation kick up to within its preferred target range, preventing it from having to make more rate cuts.

He stressed the bank was not targeting inflation “because we are inflation nutters” and that the mandates of the bank were to maintain full employment and the economic prosperity and welfare of the country.

The latest jobs data shows the economy created 42,300 new jobs last month – outstripping economists’ expectations of a gain of 16,000 new positions, but not enough to change the unemployment rate of 5.2 per cent.

Dr Lowe reiterated his earlier calls for governments to increase fiscal spending and structural reforms to help boost employment growth.

“As a country we should also be looking at other ways to get closer to full employment. One option is fiscal policy, including through spending on infrastructure,” he said.

“Another is structural policies that support firms expanding, investing, innovating and employing people.”

Throughout Dr Lowe’s speech he outlined how the supply of labour in the market had grown and how this increase in supply had generated only a “modest” rise in wage growth.

He pointed to underemployment as an alternative key measure to watch as a sign of an improving labour market.

“The shift to part-time work means that in assessing spare capacity we need to consider measures of underemployment as well as measures of unemployment.”

A higher participation rate was a reason why unemployment was not decreasing. Dr Lowe noted the participation rate had increased to a record high and the working-age population with a job was near the record reached at the peak of the resources boom.

One area showing tightening in the labour market was the relationship between people seeking employment and available jobs.

“Another lens on job matching is the ratio of the number of unemployed people to the number of job vacancies.”

“At present, there are fewer than three unemployed people for each vacancy. This compares with over 20 people for every vacancy in the early 1990s recession and five people for every vacancy in 2014.”

He said while this pointed to some tightness in the labour market it was still not enough to see a big pick up in wage growth.

Article appeared in The Australian Financial Review on 20 June 2019.

Article written by Matthew Cranston and Simon Evans.

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