Reserve Bank sharpens focus on July rate cut

The RBA’s board agreed further cuts to the cash rate are “more likely than not”, minutes show.

The Reserve Bank of Australia building in Sydney. Picture: AAP

The Reserve Bank of Australia expects further cut in interest rates would be needed given the amount of spare capacity in the job market and to reverse a downward drift in inflation.

“Given the amount of spare capacity in the labour market and the economy more broadly, members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead,” the central bank said in the minutes of its June 4 policy meeting.

The comments will sharpen expectations of another rate cut in July, especially after recent jobs data has remained soft.

The Australian dollar and bond yields slipped and shares rose after the RBA’s introduction of the more explicit easing bias in the minutes.

The RBA’s official cash rate was lowered to a record low 1.25 per cent from 1.5 per cent on June 4. Financial markets have already priced in further cuts, while increasing numbers of bank economists have forecast a string of cuts before the end of the year, while discussing the potential for unorthodox policy measures, and quantitative easing.

The RBA also renewed pressure on the Coalition government to help boost the economy through added spending, saying lower interest rates was not the only path toward a stronger economy.

“Lower interest rates were not the only policy option available to assist in lowering unemployment, consistent with the medium-term inflation target,” the minutes said.

Treasurer Josh Frydenberg has so far resisted the RBA’s calls, signalling he won’t go beyond the government’s already-pledged income tax cuts and planned infrastructure spending.

The Commonwealth Bank of Australia capitulated on a long-held upbeat view on the economy, saying the RBA will need to cut the cash rate to 0.75 per cent before the end of the year given the extent of heavy lifting needed to lower the unemployment rate to a level consistent with rising wage and inflation.

RBA Governor Philip Lowe lowered the RBA’s estimate of full employment at the start of June, saying it is likely somewhere closer to an unemployment rate of 4.5 per cent than the 5.0 per cent estimate used in recent years.

Unemployment has risen back above 5.0 per cent in recent months. Economic growth has also slowed to its weakest pace in a decade, and inflation was unchanged in the first-quarter from the final quarter of 2018.

The RBA said it sees little risk in cutting interest rates, as record household debt, and a recent sharp drop in house prices would not lead to a sudden jump in inflation.

“Given the extent of spare capacity in the economy and the subdued inflationary pressures, they (the RBA board) judged there was a low likelihood of a decline in interest rates resulting in an unexpectedly strong pick-up in inflation,” the minutes said.

Core inflation came in at 1.4 per cent on-year in the first-quarter, well below the target band of 2-3 per cent. Inflation has been below target for over three years, with the RBA saying the target has always been flexible, but that flexibility is not limitless.

The Australian dollar fell about 15 points to a five-month low of US68.41 cents as three-year and 10-year bond yields fell almost three basis points to 1.005 per cent and 1.372 per cent respectively.

The S&P/ASX 200 rose about seven points to be up as much as 0.4 per cent at a three-day high of 6559.5.

Dow Jones Newswires