Interest Rates

Interest Rates to Remain Low – But Not Too Low: RBA

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Australia is unlikely to see “negative” or “below-zero” interest rates.  At the same time, with wage growth at record lows, interest rates are likely to be at moderate levels for some considerable time.

That is the conclusion of two recent speeches from the Reserve Bank of Australia (RBA)

Australia Unlikely to Have Negative or Below-Zero Interest Rate

In a speech to the Australian Business Economists Dinner in Sydney RBA Governor Dr Philip Lowe addressed the possibility that interest rates could go below zero in Australia, but said it was more likely that interest rates would stay very low for an extended period.

Dr Lowe did not rule out further rate cuts, but said the economy was benefiting from the already low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector.

He said the forecast remains for Australia’s economic growth to pick up, and to reach about 3 per cent in 2021.

“This pick-up in growth should see a reduction in the unemployment rate and a lift in inflation,” Dr Lowe said.

“So we are expecting things to be moving in the right direction, although only gradually.”

Some economists are forecasting another cut to the cash rate early next year, most likely in February.

Negative rates, or zero interest rates, have been a feature in European countries including Denmark, Sweden and Switzerland, and also in Japan.

On the same day, his deputy Dr Guy Debelle explained in a separate speech that the proportion of firms expecting stable wages growth in the year ahead is around 80 per cent and only around 10 per cent anticipate stronger wages growth.

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There is growing evidence to suggest that wage adjustments of 2 point something per cent have now become the norm in Australia, rather than the 3–4 per cent wage increases that were the norm prior to 2012.

Insipid wage growth in Australia has been one of the reasons why the RBA has made three rate cuts in 2019.

Yet, Dr Lowe emphasised that Australia’s growth prospects are stronger, our banking system is in good shape, our demographic profile is better and we have not had a period of deflation.  In other words, while rates will remain low, the Reserve Bank remains positive for our economy

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