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Chief economist update: Lowe taking interest rates lower

The numbers may be better than market expectations but they still don't diminish the fact that Australia's labour market remains weak.

The Australian Bureau of Statistics reported that the country's unemployment rate increased to 6.9% in September from 6.8% in the previous month and the underemployment rate ticked up to 11.4% from 11.3% over the same period. Likewise, a total of 29,500 workers - 20,100 full-time and 9,400 part-time - lost their jobs over the month.

Financial markets expected employment to decline by 35,000 in September and the unemployment rate to climb to 7.1% -- heading to the 7.25% forecasts in the 2020-21 Budget.

Not good enough and not if the RBA could help it.

Speaking at Citi's 12th Annual Australia and New Zealand Investment Conference, RBA Governor Philip Lowe all but confirmed that further easing in monetary policy is in the works.

Although he believes that "a recovery is now under way and we can look forward to this continuing" and "recent budget provided welcome further support to the economy", saying the RBA wants "to see more than just 'progress towards full employment".

The board views addressing the high rate of unemployment as an important national priority. Consistent with our mandate, we want to do what we can do, with the tools we have, to ensure that people have jobs. We want to see a return to labour market conditions that are consistent with inflation being sustainably within the 2 to 3% target range.

To do this, Lowe reiterated the central bank's forward guidance not to increase "the cash rate for at least three years" and that "we have been considering what more we can do to support jobs, incomes and businesses in Australia to help build that important road to the recovery".

While we've heard all these before, this time is different.

In his speech, the governor laid out the case for another interest rate reduction or quantitative easing, or both, perhaps as soon as the next board meeting in November.

"When the pandemic was at its worst and there were severe restrictions on activity we judged that there was little to be gained from further monetary easing. The solutions to the problems the country faced lay elsewhere. As the economy opens up, though, it is reasonable to expect that further monetary easing would get more traction than was the case earlier," Lowe said.

"To the extent that an easing of monetary policy helps people get jobs it will help private sector balance sheets and lessen the number of problem loans. In so doing, it can reduce financial stability risks.

"Australia is a mid-sized open economy in an interconnected world, so what happens abroad has an impact here on both our exchange rate and our yield curve. In the past, the interest differentials provided a reasonable gauge to the relative stance of monetary policy across countries. Today, things are not so straightforward, with monetary policy also working through balance sheet expansion. As I noted earlier, our balance sheet has increased considerably since March, but larger increases have occurred in other countries. We are considering the implications of this as we work through our own options."

For sure, fiscal -- tax cuts; welfare spending programmes, etc. - and monetary support - lower interest rates have increased household incomes but recent data show that these have been mostly saved - the household savings ratio soared to 19.8% in the June quarter from 6.0% in the March quarter and 3.6% in the three months ended December 2019.

To quote governor Lowe: "What are people going to do with this extra saving and improved debt situation ... how willing people and businesses are to draw on their accumulated financial buffers to spend and invest over the months ahead?"

Read our full COVID-19 news coverage and analysis here.

Read more: RBAPhilip LoweAustralian Bureau of StatisticsCiti
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