AAP Finance

RBA’s Lowe urges govt to support growth

By AAP Newswire

Reserve Bank Governor Philip Lowe says it is "unrealistic" to expect a lower cash rate to boost growth on its own and has repeated his call for the government to support the economy with fiscal stimulus such as infrastructure investment.

Dr Lowe says April's increase in the unemployment rate to 5.2 per cent - which was sustained in May - and stubbornly low GDP growth indicate that few inroads are being made into the economy's spare capacity.

He told a Committee for Economic Development of Australia event in Adelaide that the 0.25 percentage point cut to the cash rate the RBA made two weeks ago would support the economy through lowering the exchange rate and the cost of business and personal finance.

"It would, however, be unrealistic to expect that lowering interest rates by a quarter of a percentage point will materially shift the path we look to be on," Dr Lowe said on Thursday.

Dr Lowe denied the decision to cut the cash rate to a fresh record low 1.25 per cent had been taken in response to a deterioration in the economic outlook since the RBA's May meeting.

"Rather, it reflected a judgment that we could do better than the path we looked to be on," he said.

Dr Lowe said fiscal stimulus and policy changes to support business investment needed to be considered to maximise national prosperity.

"As a country we should also be looking at other ways to get closer to full employment," Dr Lowe said.

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

Nonetheless, Dr Lowe reiterated that further rate cuts were likely, echoing the minutes of the RBA's June meeting, which were released on Tuesday.

Dr Lowe's comments had many economists bringing forward estimates for the timing of the next cut, with NAB's Alan Oster now expecting a cut in July instead of August.

With the US Federal Reserve having also signalled a dovish shift overnight, UBS flagged an additional cut in November on top of the August reduction it already expected.

JP Morgan economist Sally Auld, speaking just before Dr Lowe's speech, said the cash rate was likely headed to 1.0 per cent by the end of the year, and to 0.5 per cent by the second quarter of 2020 by the latest.

"Clearly Lowe has said to the government 'it would be great if you guys could do more on the fiscal front' and it doesn't feel like the government has fully embraced that message yet," she told a Bloomberg event in Sydney on Thursday.

"There might be a bit of a Mexican standoff over maybe the last quarter of the year where the RBA keeps pushing the government and the government says 'the surplus is paramount'."