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RBA’S Lowe gives positive assessment of the Australian economy - ANZ

FXStreet (Delhi) - Cherelle Murphy, Co-Head of Australian Economics at ANZ, notes that RBA Deputy Governor Philip Lowe struck an optimistic tone today, and noted that the Bank retains flexibility on interest rates while he emphasised that Australia’s economic fundamentals were good and the economy has high degree of flexibility.

Key Quotes

“Most of Dr Lowe’s remarks focused on the microeconomic reform agenda that would lift Australia’s living standard over the medium term, and so he did not directly address the near term path for interest rates in his speech.”

“Some key points Dr Lowe made were:

• There continued to be some flexibility in monetary policy given the cash rate had not been reduced to zero as policy rates have in many other advanced countries.
• Monetary policy still works, as seen through its impact on housing construction and the exchange rate. But lower interest rates are not as effective as they used to be, as low interest rates seem to be helping households to pay back their debt sooner, rather than encouraging household spending.
The probability of recession is low but we cannot rule out the possibility of a downturn. There will be a cycle, and we have had a remarkable 25 years.
• On the US he said there has been some movements in capital flows from emerging markets back to the US, even ahead of the Federal Reserve increase in rates. He said there might be some stresses in capital markets.”

Dr Lowe did not address our concerns about growth in 2016 and 2017, which recently led us to lower our interest forecast to 1.5% by mid next year. We think further rate cuts will be necessary as concerns simmer about the unpredictability of international economic conditions, while the boost from housing starts to fade as the impact of the lower AUD on services trade lessens.”

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