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Next move in Australia cash rate likely up, but cut not ruled out: central banker
[SYDNEY] A cut in Australian interest rates could not be ruled out, a senior central banker said on Monday, but emphasised that the next move was still likely an increase given expectations for a gradual acceleration in inflation.
The Reserve Bank of Australia (RBA) has remained patient on policy since last reducing the cash rate to a record low 1.50 per cent in August 2016. It has repeatedly cautioned that further cuts will only fuel a debt binge in the country's housing market. Governor Philip Lowe has warned that lowering rates further will not be in the "national interest".
Assistant governor Christopher Kent described as "fairly small" a recent shift by financial markets to price in a small chance of a rate cut next year following soft economic data.
Futures are now pricing in a 12 per cent probability of a 25 basis point cut in interest rates next year compared to a feeble chance of an increase before last week's data showed economic growth slowed to 0.3 per cent in the third quarter.
"We have said that it's likely the next move is up, it doesn't mean if it's needed the next move might not be down," Mr Kent said at a Bloomberg event in Sydney.
"But that's not in our forecasts which are for a gradual fall in unemployment and a gradual rise in inflation. And that's why the next move will likely be up."
Australia's jobless rate has fallen to a 6-1/2-year low of 5 per cent. The RBA has predicted it will slip further to 4.75 per cent in mid-2020.
Even so, there are little signs of wage growth across the economy and inflation is still below the RBA's medium-term target band of 2-3 per cent.
Mr Kent spoke about some risks facing Australia's A$1.8 trillion (S$1.8 trillion) economy, including the ongoing Sino-US trade war, a potential sharper slowdown in China and tighter credit conditions at home.
Australia's export-heavy economy is dependent on the fortunes of world trade so a global slowdown will prove negative for domestic activity.
Mr Kent pointed out an "unnecessary" credit tightening by Australia's major banks as a threat to the RBA's positive outlook.
"There is a risk that the supply of credit tightens unnecessarily given the economic conditions," Mr Kent said. "And these conditions are very positive... so that's not an environment that would warrant a tightening."
Australia's biggest banks have become extra cautious about lending amid a government-mandated powerful inquiry that has exposed rampant greed and wrongdoing.