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RBA Flags Interest Rate Cut Ahead Of October Meeting

Reserve Bank Governor Philip Lowe believes the drought is contributing to slower growth in the Australian economy but has acknowledged that the other reasons for the slowdown have come as a surprise. 

In a speech to the Armidale Business Chamber on Tuesday night, Lowe said the extremely dry conditions have led to a fall in Australia's farm output in the past two years and a "sharp drop" in farm income.

The drought has also put upward pressure on food prices, especially bread, milk and meat, Lowe added.

"These difficult conditions have contributed to the weakness in overall household incomes and consumption, and the effects are particularly felt in regional communities," he said in Armidale on Tuesday night

Reserve Bank Governor Philip Lowe. Photo: AAP/Bianca De Marchi

"We are all hoping that the drought breaks soon".

He also acknowledged the RBA doesn't fully know why the economy is growing so slowly.

"Part of the slowing in the Australian economy remains unexplained," he said.

"We are seeking to understand what is going on here. It is possible that it is just measurement noise, but we can't yet rule out something more structural."

Dr Lowe pointed to the US and China trade dispute, Brexit, tensions in the Middle East, Hong Kong and between Japan and South Korea as having disruptive effects on international trade.

"Over the past year there has been no growth at all in international trade, despite the global economy growing at a reasonable rate," he said.

Stanthorpe Drought
The drought has slowed down the economy. Photo: Facebook/Aratula Market, Warwick Farmers Market & Stanthorpe Markets.

"In the face of this uncertainty, it is not surprising that many businesses are preferring to wait before committing to significant investments; they are inclined to sit on their hands for a while and see how things play out."

READ MORE: Reserve Bank Drops Interest Rates To Even Lower Historic Low

The governor noted while there isn't an expectation of a return to strong economic growth, the RBA is forecasting growth to pick up as a result of lower interest rates, tax cuts, the depreciation of the Australian dollar and infrastructure spending.

Lowe also hinted at further rate cuts to be announced at the RBA board meeting next week.

"The board is prepared to ease monetary policy further if needed to support sustainable growth in the economy, make further progress towards full employment, and achieve the inflation target over time," he said.