Australia’s central bank would cut interest rates again “if needed” to support employment, wages growth and inflation, having already eased twice since June to a record low of 1%.
Minutes of the Reserve Bank of Australia’s (RBA) July policy meeting showed its board decided that cutting rates by another quarter-point, together with a similar move the previous month, would help speed up the economy.
While the door is ajar for further policy easing, the RBA is tightlipped about the timing, as opposed to the past two months when it was more explicit.
“Lower interest rates would provide more Australians with jobs and assist with achieving more assured progress towards the inflation target,” according to the minutes released on Tuesday.
“The Board would continue to monitor developments in the labor market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”
Australia’s A$1.9 trillion economy ($1.3 trillion) is expanding at its weakest pace since the global financial crisis, weighed by a long downturn in the property market and sluggish household consumption.
Financial markets have already priced in a real chance of another rate cut to 0.75% by year-end. Economists polled by Reuters prior to the July 2 meeting predicted a third cut in November.
“There is no clear signal on the timing of another rate cut and we continue to expect a 25-basis-point (bps) cut in November, with a risk of an earlier move depending on the labor market and inflation,” said Kaixin Owyong, Sydney-based economist at National Australia Bank.
Australia’s labor market is rapidly adding jobs but that is still not enough to pull the unemployment rate below 5% as more people are looking for work.
Data due on Thursday will likely show further employment growth in June with the jobless rate still stuck at 5.2%. That spare capacity is putting a lid on wage growth and inflation.
The RBA board noted that public sector investment in welfare schemes and infrastructure had helped boost first-quarter growth, a nudge to the newly re-elected government of Prime Minister Scott Morrison to do more.
RBA Governor Philip Lowe has openly called for more fiscal stimulus in recent public outings. So far, Morrison has downplayed the need for such support and stuck to plans for returning the budget to surplus in 2019/20.
That means, “the risk is that the burden continues to fall on the RBA,” said Royal Bank of Canada economist Su-Lin Ong, who sees the cash rate at 0.5% by 2020.
Tuesday’s minutes showed the board judged lower rates would support the economy by keeping the value of the Australian dollar lower than it would otherwise be, while also reducing borrowing costs for households and businesses.
Yet, despite two rate cuts since June the Aussie has risen from a 5-1/2 month trough of $0.6829 to current levels around $0.7040. The currency eased a bit after the minutes and was last at $0.7030.
The gains owe much to intense speculation the US Federal Reserve will start cutting its rates this month, followed by other major central banks.
That suggests the RBA may have to ease yet further to prevent an unwelcome rise in the Aussie dollar.
For now, RBC’s Ong expects the RBA to shift to the sidelines as it assesses the impact of its cuts, government tax rebates and recent easing of mortgage lending rules.
“The timely confidence, housing, and consumption data are likely to be at the top of the RBA’s watch list in the coming months,” Ong added. “The RBA will be expecting some improvement and the onus is on the data to show this.”