SYDNEY • Australian central bank chief Philip Lowe (picture) shifted to a neutral policy outlook as he acknowledged increased economic risks at home and abroad, sending the nation’s currency down by more than half a US cent.

“Over the past year, the next-moveis-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced,” Lowe said in a speech in Sydney yesterday.

The governor said the job market will remain the key swing factor: If Australians are finding jobs and wages rise faster, inflation should accelerate and “it will be appropriate to lift the cash rate at some point”.

“On the other hand, given the uncertainties, it is possible that the economy is softer than we expect, and that income and consumption growth disappoint,” Lowe said.

In the event of a sustained increase “in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point. We have the flexibility to do this if needed”.

The Australian dollar dropped to 71.64 US cents (RM2.93) at 2:24pm yesterday in Sydney compared to 72.42 cents before the speech.

The Reserve Bank of Australia’s (RBA) step back from its tightening bias reflects weak household spending, slumping house prices and persistent weak inflation against a backdrop of slower global growth.

After standing pat for 21⁄2 years as much of the developed world’s central banks started hiking rates, its stance is now more in step with global peers including the US Federal Reserve that are pausing their tightening cycles or dumping their hawkish bias.

The consistent bright spot for the RBA has been the labour market. Unemployment has fallen to 5% and hiring remains strong, though as in other developed nations, this has failed to translate into the faster wage growth and higher inflation.

The RBA has kept its cash rate at a record-low 1.5%, seeking to play a stabilising role in the economy and willing to ride out weak inflation to avoid encouraging heavily-mortgaged households from borrowing further. Sydney property prices have fallen more than 12% from a July 2017 peak.

“What we are seeing looks to be a manageable adjustment in the housing market,” Lowe said. “It is not expected to derail economic growth. The previous trends in debt and housing prices were becoming unsustainable and some correction was appropriate.”

Lowe said he expects a pick up in household disposable income to provide a counterweight to the wealth effects of lower housing prices.

Lowe also expects “a stronger GDP outcome in the December quarter” after growth slowed in the third quarter amid weaker consumption. For 2019 and 2020, forecast economic growth “has been revised down by around a quarter percentage point, largely reflecting a modest downgrading of the outlook for household consumption and residential construction”.

The outlook for the labour market “remains positive”. The central scenario is that growth will be sufficient to see “a modest further decline” in unemployment to around 4.75% over the next couple of years”.

The RBA will release its quarterly update of forecasts for economic growth, inflation and unemployment tomorrow. — Bloomberg