Asia

Australia central bank signals rate cut in June as economic growth cools

SYDNEY (Reuters) – Australia’s central bank would consider cutting interest rates next month to support the economy, Governor Philip Lowe said on Tuesday as he urged the country’s newly re-elected government to do its part by slashing income taxes and boosting spending.

“A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target,” Lowe said in a speech in Brisbane.

“Given this assessment, at our meeting in two weeks’ time, we will consider the case for lower interest rates.”

A cut would be the first since the Reserve Bank of Australia’s (RBA) last easing to a record low 1.50% in August 2016.

RBA Board members were already tilting toward an easing bias, minutes of the central bank’s May policy meeting released earlier showed.

Financial markets are now pricing in an 86% chance of a lower rate in June from around 50 percent before the minutes. The Australian dollar eased to $0.6894 from $0.6913.

The prospect of policy easings comes as Australia’s prudential regulator proposed to loosen assessment criteria that banks use when making loans, a decision widely expected to ease credit constraints across the economy.

The move was welcomed by investors and analysts who say it could help revive the country’s crumbling housing market.

“The net impact of the changes should be a sizeable lift in maximum borrowing capacity for new owner-occupiers,” said Robert Thompson, a Sydney-based strategist at RBC. “The timing is… auspicious as we move into a period where growth, inflation and the labor market are all slowing.”

Growth in Australia’s $1.3 trillion economy braked to an annualized 0.8% in the December quarter and signs are that momentum likely slowed further in the three-months ended March to the weakest since the 2008 global financial crisis.

At the same time, inflation has remained under the RBA’s 2-3% target band and the unemployment rate has now ticked up to an eight-month high of 5.2% from decade lows of 4.9% hit in February.

In his speech titled ‘The Economic Outlook and Monetary Policy’, Lowe pointed to a slowdown in household consumption as the biggest reason behind the broader economic downturn.

Over the second half of 2018, consumer spending ticked up by just 0.75%, “an unusually soft outcome”, he noted while calling on the newly elected center-right coalition government to play its part in boosting household incomes.

“Stronger growth in income will help, but the more important factor is some tax relief,” Lowe said while noting tax paid by households over the past year jumped 10%, a much faster clip than income growth of a measly 3.25%.

“That is a big difference and it is unusual.”

But Lowe will probably have to wait as the government led by Prime Minister Scott Morrison might not meet a June deadline for tax breaks if parliament is unable to convene in time.

Lowe urged the government to help boost economic growth including through additional fiscal support, infrastructure spending and changes to government policies to lift business investment.

“Relying on just one type of policy has limitations, so each of these is worth thinking about.”

($1 = 1.4472 Australian dollars)

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