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Australasia, Forex

Australia economy may be at turning point, rates to stay low-RBA

(Recasts, adds comments from Lowe, context.)

CANBERRA, Aug 9 (Reuters) – Australia’s economic slowdown may have ended but interest rates will remain at historic lows for an extended period, with the U.S.-China trade war the major uncertainty for the global economy, the central bank head said on Friday.

The Reserve Bank of Australia (RBA) held rates at an all-time low of 1% at a policy review on Tuesday, after cutting them by 25 basis points in both June and July. It has lowered its forecast for growth this year to 2.5%, and expects growth of 2.75% in 2020.

“There are signs the economy may have reached a gentle turning point,” RBA Governor Philip Lowe said in his semi-annual testimony to a parliamentary committee in Canberra.

That outlook was supported by lower interest rates, tax cuts, a weaker Australian dollar, a stabilisation of the housing market after a downturn, and an improving outlook for investment in the resources sector and ongoing infrastructure spending.

“Consistent with this, we are expecting the quarterly GDP growth outcomes to strengthen gradually after a run of disappointing numbers,” Lowe said.

But with unemployment having risen this year and wages growth remaining subdued, Lowe conceded that it was taking longer than expected for inflation to rise into the RBA’s 2-3% medium-term target range.

He said it was “reasonable to expect an extended period of low interest rates”, with Australia unable to insulate itself from long-term shifts in rates around the world.

“While we might wish it were otherwise, it is difficult to escape the fact that if global interest rates are low, they are going to be low here in Australia too,” he said.

Responding to questions from the committee, Lowe said it was unlikely but possible that the cash rates could be reduced to zero.

Markets expect global central bank stimulus, including a larger than expected 50 basis point cut by New Zealand on Wednesday, to compel the RBA to cut again before year-end. Lowe said they would act if judged necessary.

But he reiterated his earlier comments that monetary policy alone could not do all the heavy lifting to revive growth, noting that governments could borrow at record low rates to fund infrastructure spending that could boost productivity.

(Reporting by Colin Packham and Swati Pandey; Writing by John Mair; Editing by Sam Holmes)

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