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RBA flags 3 risks to Aussie prosperity

How Lowe can interest rates go?

Jack Derwin

Digital Journalist, Your Money

Addressing the National Press Club, Reserve Bank of Australia (RBA) governor Philip Lowe has warned of the three major risks to the country’s economic growth outlook.

Read more: What is the Reserve Bank and how does it work?

While remaining upbeat about this year’s “reasonably good growth” prospects, with a reasonably strong economy, low unemployment, growing investment and solid commodity prices, Lowe said there were also risks.

Philip Lowe delivers an address to the National Press Club in Sydney, Wednesday, February 6, 2019. (AAP Image/Dan Himbrechts)

“The reality is the future is uncertain and none of us can say what will happen,” he said.

It appears too that the historic low-interest rate of 1.5 per cent will remain on hold for a while yet, with the likelihood of either a rate hike or a rate cut appearing “evenly balanced”.

“Whether it’s 50/ 50 or 55/ 45, I don’t want to comment on that because our crystal ball isn’t clear enough to know that,” Lowe said.

There were however three major issues that could push the RBA to cut rates further.

1. Falling property prices

While strong infrastructure investment and a strong labour market are helping the Australian economy tick along, Lowe claimed weakening property markets were a “major domestic uncertainty”.

“We seem to have moved seamlessly from worrying that prices were going up and were too high, to worrying about them going down,” Lowe said.

Pointing to the rapid run-ups in Melbourne and Sydney, increased supply coming to market, softening demand from overseas buyers, and tightened lending standards, Lowe said the falling prices were not a reflection of economic risk.

While the correction appears orderly for now, if prices keep falling the RBA could be forced to cut rates- making credit cheaper- in order to stimulate and stabilise the market.

“Given the uncertainties, we are paying very close attention to how things evolve,” Lowe said.

2. Australians aren’t spending

Closely linked to the property market is household spending.

Australians have been hanging onto their money for longer with spending having long-remained flat, depriving the economy of added stimulus.

With the expectation that spending won’t pick up without wages growth (see #3), that could continue to drag on the economy.

“It is possible that the economy is softer than we expect and that income and consumption growth disappoint,” Lowe explained.

“In the event of a sustained increase in the unemployment rate and a lack of further progress on towards the inflation objective, lower interest rates may be appropriate at some point and we have the flexibility to do this.”

3. Weak wage growth

Despite having enjoyed 27 years of consecutive growth, Australia like many developed countries largely hasn’t managed to pass on greater wages to its workers. 

That theme, which is playing out overseas around the world, will continue to be a concern for global growth on which Australia is dependent, and a potential catalyst for greater uncertainty.

“There is a common economic element to [these risks] and that is the extended period of little or no growth in real incomes for many people,” Lowe said.

“In a number of countries, growth in real wages has been weak or negative for some years. Advances in technology and greater competition as a result of globalisation mean many people worry about their future and that of their children,” he explained.

With Brexit, the US-China trade war, and populist politics all threatening to dampen or even derail economic growth overseas, it also poses a threat to Australia’s future prosperity.

“Understandably politicians around the world are responding to these concerns. Time will tell though if the various responses will help. I suspect though that some of these responses will not help.”

Watch the full speech above and more analysis below. 

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