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© Reuters. Pedestrians pbad by the Reserve Bank of Australia building in central Sydney
By Swati Pandey
SYDNEY (Reuters) – The Australian central bank has opened the door to a possible rate cut as it has recognized growing economic risks in a remarkable change in its long-standing tightening bias that had driven down the local dollar.
In his first public address of the year, Philip Lowe, Governor of the Reserve Bank of Australia (RBA), announced that rates could move in both directions, depending on the strength of the labor market and the future. # 39; inflation.
"For most of last year, it seemed more likely that the next move in interest rates would be up rather than down." But now the situation is more balanced, "Lowe said.
The policy change took some investors by surprise because the day before, the RBA had avoided any sign of relaxation by maintaining its key rate at a record rate of 1.50% for the 30th consecutive month.
Not surprisingly, the Australian dollar slid 1.1% to hit a one-week low of $ 0.7153.
"We were a little surprised to find that the move to a clearly neutral position was not announced yesterday," said Su-lin Ong, senior economist at RBC Capital Markets, based in Sydney, after suspending his previous call for higher rates later this year.
"Nevertheless, we consider that a neutral position is more appropriate and prudent.There is a high degree of uncertainty and risk, which argues in favor of a more patient reserve bank."
Economist Gareth Aird of the Commonwealth Bank of Australia has also abandoned his previous call for a tighter policy.
"Indeed, a rate hike should not be envisaged in the foreseeable future.We have the RBA on standby until the end of 2020, when a first rate hike would be appropriate if the RBA's forecasts of growth, wages and inflation materialized. "
Australia is not alone in having to adjust its policy expectations.
Last week, the US Federal Reserve virtually dropped its rate hike project, citing the slowdown in global growth as a risk to the world's largest economy. The European Central Bank also seemed less sure of starting to contract later this year.
Lowe's speech highlighted the difficult balance policymakers face when trying to manage market expectations and ease the pressure on growth.
"It's still quite plausible that the next shot be lifted," said the head of the RBA.
"But it is also possible that income growth will not accelerate, that the labor market will deteriorate … and that business confidence will decline."
JOBS AND GROWTH?
Lowe listed the ongoing Sino-US trade war, the rise of global populism, Britain's complicated exit from the European Union, the political hurdles in the United States and the slowdown in the economy among the risks weighing on the prospects of the RBA.
Reflecting these concerns, interest rate futures now provide for a possibility of reducing the RBA rate to 56 before the end of the year. A complete reduction of 25 basis points is expected by the middle of 2020.
The central scenario of the RBA predicts a growth of the economy of A $ 1.8 trillion from 3% compared to 2019 and 2.75% over 2020.
This will help lower the unemployment rate to 4.75% from a low of 5.0% in seven years. The RBA expects wage growth and inflation to pick up gradually over the course of the 2020s, if it is the same.
"Their macroeconomic forecasts always badume higher-than-trend growth, a lower unemployment rate and target-level inflation, so the move to neutrality today shows that they are not totally Confident of these forecasts, we believe that they will be revised during this year, "RBC Ong said.
Lowe said he was closely watching the labor market, which has tightened since early 2017, with an unemployment rate down to 5%, its lowest level in seven years.
If employment growth continues and wages rise faster, "the cash flow rate will need to be raised at some point," said Lowe.
On the other hand, if the unemployment rate started to rise and inflation remained lukewarm, the RBA could be forced to reduce rates to unprecedented levels, he said.
"We have the opportunity to do it, if necessary."
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