But further rate cuts would be on the agenda only if the jobs market deteriorated.
The governor said while lower rates would likely lead to a drop in unemployment, a lower Australian dollar, push inflation back towards the RBA’s target band at a faster rate and add to upward pressure on wages, there were risks.
The biggest was if people decided to take on more borrowing, that would likely put upward pressure on a housing market already seeing a strong lift in prices since the RBA started cutting rates.
“Would we enhance the medium-term outcomes for the Australian economy by lower interest rates today? I think in the short term we’d be probably a bit better off,” he said.
“Over the next five or 10 years would we be better off today if the main effect is we encourage people to borrow more?
“Lower interest rates could encourage more borrowing by households eager to buy residential property at a time when housing debt is already quite high and there is already a strong upswing in housing prices in place. If so, this could increase the risk of problems down the track.”
His comments came as the bank released its quarterly outlook on the national economy, which showed small downgrades for the next few months, partly driven by the impact of the bushfires and coronavirus outbreak.
Household consumption is now tipped to grow by just 2 per cent this year. In its November forecasts, the bank was tipping 2.4 per cent.
The RBA revealed it now expects wages to grow by 2.3 per cent over the next year and then slow a little to 2.2 per cent by the end of the 2021-22 financial year.
The federal government was forced to downgrade its own wage growth forecasts in its mid-year budget update in a move that contributed to a $32.6 billion write-down in revenues over the forward estimates.
The budget is predicated on wages growth reaching 3 per cent by 2022-23 but the RBA believes that is highly unlikely.
Dr Lowe said he did not see Australia achieving a 3 per cent wage growth rate “any time soon”.
NAB senior analyst Kieran Davies said it appeared Dr Lowe was concerned that further falls in interest rates could be a risk to the nation’s financial stability.
“He is concerned that lowering rates might lead to a pick-up in already high household debt, creating a longer-term vulnerability for the economy,” he said.
Senior Commonwealth Bank economist Kristina Clifton said despite the bank’s worries about taking interest rates down further, it was likely to be pressed into action due to general weakness across the economy.
“Without help from other policy arms, which isn’t looking likely at this stage, we are likely to need more policy stimulus for the RBA to meet their objectives,” she said.
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.
Jennifer Duke is an economics correspondent for The Sydney Morning Herald and The Age, based at Parliament House in Canberra.
Eryk Bagshaw is an economics correspondent for The Sydney Morning Herald and The Age, based at Parliament House in Canberra