Australia’s central bank has some room to slash policy rates from current record lows although the next move is still likely to be an increase rather than a decrease, said Deputy Governor Guy Debelle.
The comments come one day after the disappointing reading on domestic economic growth led financial markets to erase any possibility of a hike in rates next year and even price in a small chance of an easing.
“The Reserve Bank has repeatedly said that our expectation is that the next move in monetary policy is more likely up than down, though it is some way off,” Debelle said during a speech titled “Lessons and Questions form the Global Financial Crisis.”
“But should that turn out not to be the case, there is still scope for the further reductions in the policy rate,” he added.
Awaiting a revival in wage growth and inflation, the Reserve Bank of Australia has kept interest rates on hold since reducing its policy rate to 1.50 percent in August 2016.
It has also been reluctant to trim rates further out of fear that it could fuel a dangerous debt binge in the property market, which is finally slowing after a catapult to all-time highs.
Investors were pricing in a modest chance of a hike by the end of the year until data released on Wednesday showed annual economic growth had slowed by more than expected last quarter, or 2.8 percent.
Interest rate futures were now implying a small 14 percent chance of a cut by next year in September.
Debelle also remarked Australia had fiscal room to stimulate the economy should that be needed and could undertake quantitative easing if absolutely necessary.
“The RBA’s balance sheet can also expand to help reduce upward pressure on funding, if necessary,” he said.
A floating Australian dollar was also an “important shock absorber” for the A$1.8 trillion economy.
Further, Debelle said that it was important to keep credit flowing to the economy and at present, the similar business models of Australia’s banks could be an impediment to that.
“Their similar behavior and similar reaction functions to events such as falling house prices run the risk of amplifying the downturn in the housing market,” said Debelle.
Home prices in Sydney and Melbourne had broadly doubled between 2008 and 2016, sparking fears of a bubble and forcing regulators to take steps to slow down the market.
Property prices have come down since, marking their worst performance since the global financial crisis. The RBA has so far sounded sanguine about the 10 percent fall in Sydney home values.
A high-level inquiry and investigations into wrongdoings in Australia’s major banks has also pushed the four giant lenders into the shell.
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“The (2008) crisis very much demonstrated the critical importance of keeping the lending flowing,” said Debelle. “That lesson is relevant to the situation today in Australia, where there is a risk that a reduced appetite to lend will overly curtail borrowing with consequent effects for the Australian economy.”