Reserve Bank of Australia sees scope for faster growth

The RBA cut interest rates this month due to subdued inflation and a sense the economy had scope to grow more quickly.

“Room for stronger growth,” said the Reserve Bank.

The Reserve Bank of Australia cut interest rates at the start of August due to subdued inflation readings and a sense the economy had scope to grow at a faster speed.

“While prospects for growth were positive, there was room for stronger growth, which could be assisted by lower interest rates,” the Reserve Bank of Australia said in minutes of its August 2 policy meeting.

The RBA cut interest rates at the policy meeting, taking its official cash rate to a record low 1.50 per cent from 1.75 per cent. It was the second cut this year and comes as inflation has dropped well below the desired 2 per cent to 3 per cent target band.

The RBA is currently forecasting inflation will stay below, or at the lower end of the target band, until the end of 2018.

Some economists warned that further interest rate cuts will be needed, and the RBA might soon need to consider implementing non-conventional policy, especially if higher growth does not emerge.

The economy has been growing solidly, supported by strong housing sector construction, rising exports of key resources like natural gas and iron ore, and growth in services industries like tourism and health care.

Still, with inflation subdued, the RBA said there is room for even faster growth rates. The RBA forecasts on-year GDP growth of between 2.5 per cent and 3.5 per cent over 2016, rising to around 3 per cent to 4 per cent by 2018, a pace considered to be above estimates of potential growth.

“Prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy,” the RBA said.

Globally, the RBA is closely monitoring China’s slowdown, saying momentum continues to be lost in the world’s second largest economy, “which was having noticeable effects on other economies with large trade exposures to China.”

China is Australia’s largest trading partner, buying vast amounts of its iron ore and coal for use in steel making and infrastructure development.

Risks around house prices have diminished, giving the RBA further room to lower interest rates.

Slower credit growth for housing and weaker prices growth “suggested that the risks associated with rising household sector leverage and rapid gains in housing prices had diminished,” it said.

House prices have surged over recent years in places like Sydney and Melbourne, supported by falling interest rates and rising foreign demand, especially from China.

The banking regulator has responded to the problem of rising house prices and mounting household debt by tightening bank lending standards, especially for investor mortgages. Barriers to foreign buying have also been increased.

Dow Jones