“It remains to be seen if future growth in demand will be sufficient to put pressure on
the economy’s supply capacity and lift inflation in a reasonable timeframe,” he said.
“It is certainly possible that this is the outcome. But if demand growth is not sufficient, the
[RBA] board is prepared to provide additional support by easing monetary policy further.”
Markets put the chance of a rate cut at the RBA board’s August 6 meeting at just 22 per cent, but they fully expect the cash rate to be reduced to 0.75 per cent by its November meeting.
They also put the chance of the cash rate reaching 0.5 per cent at better than 50-50 by the middle of next year.
Dr Lowe said the bank had failed to cut rates earlier because it believed unemployment would fall, which in turn would lead to faster wages growth and a lift in inflation back into the RBA’s target range.
But with participation rates increasing sharply, especially among older Australians, there was less pressure on wages which suggested a structural change taking place in the jobs market.
“Older Australians and women have stayed in the workforce much longer than ever before. Dare I say it’s almost a structural change which is partly driven by demand for labour and other things in society … but there are more options now to return to work,” he said.
New figures from the Australian Bureau of Statistics on Thursday showed the number of people aged 65 or over in the jobs market had swelled by 25 per cent in the past two years. By contrast, among those aged between 15 and 64 the number had increased by 4.5 per cent.
Regardless of whether the RBA moved rates again this year, Dr Lowe told homeowners, workers and banks to expect interest rates to remain at record lows for the foreseeable future because the board remained committed to pushing up inflation back within the 2 to 3 per cent target range.
He rejected calls in some quarters for the bank to cut its target range, warning that to do so may entrench a low inflation mindset and undermine the RBA’s economic credibility.
Commonwealth Bank senior economist Kristina Clifton said the increase in the participation rate had made it more difficult for the RBA to get unemployment down to its stated targeted of 4.5 per cent.
“We think that the RBA will need to cut the cash rate again to achieve their objective of full employment and lift aggregate demand,” she said.
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.
Eryk Bagshaw is an economics correspondent for The Sydney Morning Herald and The Age.
Carolyn Cummins is Commercial Property Editor for The Sydney Morning Herald.