RBA chief sees ‘half-glass full’ outlook

It doesn’t look like Reserve Bank governor Philip Lowe and the central bank board are about to push for another interest rate cut.


Lowe told a conference this week he was a ‘half glass full’ kind of guy and that there’s a lot to be positive about when it comes to the economic outlook.

The global economy is in a better position than it has been for some time and the “animal spirits” of the business world – missing for “quite a while” – might be on the comeback.

The pick-up was helping Australia, which will likely see economic growth a bit stronger than recent times.

However, there are potential headwinds that the central bank is watching carefully.

In particular, Lowe told the Australian National University’s Crawford Australian Leadership Forum wage growth was “unusually low”, average working hours had declined, household debt was rising and house prices were high in the largest cities.

All up, financial markets see no change in the RBA cash interest rate this year, and possibly a rate hike towards the end of 2018.

While some economists, like those at JP Morgan, believe there’s still a chance of another cut in the rate – which has been at a record low 1.5 per cent since August – the general view is monetary policy is on hold for the foreseeable future.

Of course, that doesn’t preclude retail banks from independently increasing their lending rates for commercial reasons in the interim.

However, the big four banks are under the scrutiny of the Australian Competition and Consumer Commission as part of the Turnbull government’s major bank levy, which cleared parliament this week.

From July 1, ANZ, Commonwealth Bank, National Australia Bank and Westpac, along with the nation’s largest investment bank Macquarie, will pay the six basis point levy, raising $6.2 billion over the next four years that will go to budget repair.

Treasurer Scott Morrison insists the banks can absorb the levy, in the same way small business and families have to absorb increased costs.

“Implementation of the levy is not an excuse for applicable banks to increase costs for customers,” Morrison says.

The consumer watchdog has been directed to undertake an inquiry into residential mortgage pricing to make sure the levy is not being used as an excuse to lift rates.

However, few believe the levy won’t be passed on to customers and shareholders.

Even Treasury, Morrison’s own department, conceded to a Senate hearing its modelling assumed some “pass through” to customers and shareholders.

Complicating matters, global ratings agency Moody’s Investors Service downgraded 12 Australian banks, including the big four, this week.

The downgrade suggests bank funding could be slightly more expensive when raising money overseas, a factor that has forced higher independent interest rate increases in the past.

Moody’s vice president Frank Mirenzi insists the downgrade had nothing to do with the bank levy, saying the majors should be able to cope through repricing some of their products or passing some of it onto their shareholders.

Rather, Moody’s believes there is an elevated risk from increased household sector indebtedness.

“The action we’re taking is about the way households might respond if there is a change in their financial circumstances – that it makes them harder to repay their mortgage debts,” Mirenzi says.

Which brings us back to wages growth, which Lowe believes is at crisis levels in many countries.

Because people feel there is more competition in the labour market, they are less inclined to ask for a wage rise.

However, Lowe thinks the labour market has become quite tight in a number of countries.

“At some point, one imagines that’s going to lead to workers being prepared to ask for large wage rises,” he says.

“If that were to happen, it would be a good thing.”

And we can all raise our half-full glasses to that.