RBA governor Philip Lowe gave context to the June decision to alter the cash rate for the first time in nearly three years at an event in Adelaide yesterday.
Lowe spoke to the importance of the labour market as a measure of economic wellbeing, as well as how cash rate cuts support the economy through lowering the cost of finance and revitalising household incomes.
He continued to say, “It would, however, be unrealistic to expect that lowering interest rates by one-fourth 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.
“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.”
Lowe said that the Australian economy is able to sustain a higher rate of employment growth and a lower unemployment rate than previously estimated. Now, the RBA hopes to reduce that spare capacity.
“Doing so will see more people in jobs, reduce underemployment and boost household incomes. It will also provide greater confidence that inflation will increase to be comfortably within the medium-term target range,” he explained.
However, Lowe called for additional measures to combat unemployment as well, rather than expecting cash rate cuts to shoulder the entire responsibility. He mentioned both fiscal policy to invest in infrastructure and structural policies that support firms expanding and employing people as possible tactics.
According to the RBA governor, the labour market “is central to all three objectives” of the RBA – contributing to the stability of the currency, the maintenance of full employment, and the economic welfare of the people of Australia.
“So, it is natural that we focus on the labour market as the board makes its monthly decisions about interest rates,” he said.