Reserve Bank keeps cash rate on hold
The Reserve Bank has left the cash rate unchanged as it waits to test the impact of three earlier rate cuts.
The Reserve Bank has left interest rates unchanged at its November board meeting.
In a widely-expected decision, the RBA said the cash rate would remain on hold at a record-low 0.75 per cent.
The decision comes after the RBA cut rates in June, July and October in an attempt to lift economic growth and lower unemployment to levels consistent with its estimate of full-employment, thereby restoring inflation to its target band.
The Australian dollar dipped slightly from US68.87c to US68.82 cents within five minutes of the decision.
RBA Governor Philip Lowe again left the door ajar for future downward movements.
In his statement, Dr Lowe kept the central bank’s guidance for a long period of low interest rates and the so-called “easing bias”, or focus on cutting rather than raising rates if needed.
“Given global developments and the evidence of the spare capacity in the Australian economy, it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target,” Dr Lowe said.
“The board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.”
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While saying that the outlook for the domestic economy is little changed from three months ago, Dr Lowe indicated that the RBA has lowered its near-term forecasts, saying the central scenario is now for economic growth of around 2.25 per cent this year versus 2.4 per cent forecast in August.
Significantly, Dr Lowe said the RBA still expects unemployment to be a little below 5 per cent in 2021 and inflation to be close to 2 per cent in 2020 and 2021.
Interestingly, he expressed no concern about the recent rise in the Australian dollar to a three month high of US69.30c, but tweaked his assessment of the Australian dollar to say it is “at the lower end of its range over recent times”, from “at its lowest level of recent times” earlier.
Dr Lowe also repeated that there have been “further signs of a turnaround in established housing markets, particularly in Sydney and Melbourne”. But dwelling activity is “still declining”, growth in demand for housing credit “remains low”, demand for credit by investors is “subdued” and credit conditions, especially for small and medium-sized businesses, remains tight.”
The decision came hours after Treasurer Josh Frydenberg confirmed that there would be no change to the RBA’s longstanding 2.0-3.0 per cent inflation target, or the way it is held to account over how it tries to meet it.
Economic data since the October rate cut have mostly been weak, but Dr Lowe has cited a “gentle turning point” in the economy, while global manufacturing data have stabilised and risks from the US-China trade war and Brexit have diminished.
Ahead of today’s decision, markets said there was only about a 4 per cent chance of a 25 basis point rate cut in November. The chance of a February rate cut is 43 per cent.
The RBA’s most recent publicly-available economic forecasts in its quarterly Statement on Monetary Policy in August were conditioned on the technical assumption that the cash rate moved in line with market pricing. At that time market pricing was for one 25 basis
point cut by year end and a further 25 basis point cut to a cash rate of 0.5 per cent in the first half of 2020.
However, the market-implied chance of the cash rate hitting 0.5 per cent next year has receded to little more than 50 per cent.
The RBA’s previous forecasts saw growth no better than its estimate of the trend or potential growth rate until mid-2021, while inflation was forecast to be well below the midpoint of its 2-3 per cent target through 2021. Unemployment was forecast to be at least 5 per cent
through 2021, well above the 4.5 per cent non-inflation accelerating rate of unemployment calculated by the RBA.
The RBA is due to provide updated forecasts in its upcoming statement on Friday.
National accounts data in September showed growth slowed to 1.4 per cent for the year to June – the weakest since the year after the global financial crisis began in September 2008.
Labour force data last month showed the unemployment rate slipped to 5.2 per cent in September from a 12-month high of 5.3 per cent in August.
Business conditions and confidence among businesses and consumers alike have remained well below average and credit growth has stayed weak.
On Monday, September retail spending data fell well short of expectations.
Inflation has remained well below target but no lower than the RBA forecast for the September quarter. House prices have surged for three months and building approvals unexpectedly rose in September.
The US Federal Reserve cut rates late last month, narrowing the US policy interest rate differential versus Australia to 87 points. US interest rate cuts have caused the short-term policy rate differential between the US and Australia to narrow to the level prevailing
before the RBA started cutting in June. It had widened to a record 138 basis points after the RBA cut in June and July.
The Australian dollar has regained US69 cents, not far from levels prevailing before the RBA started cutting interest rates again in June.
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