Reserve Bank leaves door open to more rate cuts

RBA leaves open the prospect of further rate reductions in coming months if job conditions don’t improve.

The Reserve Bank has cut rates twice in recent months. Will it cut again? Picture: AFP

The Reserve Bank of Australia has left open the prospect of further interest rate cuts in coming months, if conditions in the job market don’t improve.

In the minutes of its July 2 policy meeting, released today, the RBA’s board said it will continue to monitor the job market closely “and adjust monetary policy, if needed, to support sustainable growth in the economy.”

The RBA cut its official cash rate in June and July, marking the first back-to-back reduction since 2012. The official cash rate now stands at a record low 1.0 per cent.

The RBA has cut interest rates to push the unemployment rate lower over time. Policy makers now estimate an unemployment rate of 4.5 per cent represents full employment. The current jobless rate sits just above 5 per cent.

With wages growth weak, the RBA said it expects spare capacity in the job market to remain a factor for some time.

“Lower interest rates would provide more Australians with jobs and assist with achieving more assured progress towards the inflation target,” the minutes said.

Westpac chief economist Bill Evans said the minutes “confirm that the board is prepared to move and probably expects to move again but prefers to wait a while to assess the impact of the first two cuts”.

“Our forecasts for growth, inflation and the unemployment rate clearly point to the need for further stimulus, and we expect that the November meeting will provide that timing.

“However we do recognise that while growth and inflation remain key policy objectives, the labour market has the most immediate priority.”

Mr Evans added that the prospect of the next rate cut coming as September or October “cannot be dismissed” in the event that employment data worsen.

Falling mortgage interest rates have brought some stability to house prices, which had been in decline since 2017. A rise in house prices over coming months would do a lot to boost consumer confidence and help boost the outlook for growth.

The resource-rich economy has slowed sharply since mid-2018 as consumer spending has dried up in response to soft wages growth and record debt levels.

Second-quarter growth data, to be published in September, is expected to show the economy growing by around 1.5 per cent on-year, well below the rate needed to bring the unemployment rate down.

Financial markets continue to price in a strong chance that interest rates will be cut again before the end of the year.

Dow Jones Newswires