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Why the RBA is worried about the Australian economy

Philip Lowe

The Reserve Bank of Australia has again called on Canberra to act, saying the official cash rate cut will not have the desired effect on the economy without the right support.

Addressing the Committee for Economic Development of Australia, RBA governor Philip Lowe suggested that monetary policy is one way of helping the economy but it needs help from the government. 

“One option is fiscal policy, including through spending on infrastructure. Another is structural policies that support firms expanding, investing, innovating and employing people,” said Mr Lowe. 

“Both of these options need to be kept in mind as the various arms of public policy seek to maximise the economic prosperity of the people of Australia,” continued Mr Lowe.

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The governor suggested rates were not cut due to a slowing down of the Australian economy, but rather indications suggesting it could do better on the employment front.

“This decision was not in response to a deterioration in the economic outlook since the previous update was published in early May,” said Mr Lowe.

“The analysis that I have shared with you today supports the conclusion that the Australian economy can sustain a higher rate of employment growth and a lower unemployment rate than previously thought likely. Most indicators suggest that there is still a fair degree of spare capacity in the economy,” continued Mr Lowe.

Mr Lowe suggested that it’s unrealistic to think a 25-basis-point reduction in the official cash rate will have the desired impact on the economy, alluding to further rate cuts.

“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. Given this, the possibility of lower interest rates remains on the table,” said Mr Lowe.

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Why the RBA is worried about the Australian economy
Philip Lowe
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