Reserve Bank of Australia still not ruling out rate cut

The RBA says a response through interest rates could be warranted if Australian consumption loses momentum entirely.

Comments by Ian Harper suggest the RBA will likely remain cautious for longer than expected.

A slump in Australian retail sales in July and August is no cause for immediate alarm, but a response through interest rates could be warranted if consumption across the economy loses momentum entirely, according to Reserve Bank board member Ian Harper.

While Professor Harper also pointed to positive economic data out recently, including employment and investment figures, his comments suggest the Reserve Bank of Australia will likely remain cautious for longer than expected, with the possibility of another rate cut not completely ruled out.

“The thing that is causing an issue for us (the RBA board) is slow growth in wages, which is feeding into slow growth in household income,” Professor Harper said in an interview with The Wall Street Journal. “If you start to lose that momentum, that might be the basis of some sort of policy action,” he said.

The Australian dollar dropped after Professor Harper’s comments hit the wires, from US77.97c to US77.75c.

Retail sales fell 0.6 per cent in August, the biggest drop since 2013. It followed a 0.2 per cent fall in July, shifting momentum in the opposite direction to economists’ expectations, and fanning fears that record household debt and stagnant wages growth will sideline consumers and slow the economy.

Professor Harper said the latest retail sales outcome was disappointing, but not alarming.

“It is yet another indication that we are not out of the woods,” he added.

Incomes in Australia are growing at their slowest pace in a quarter of century, and the International Monetary Fund recently highlighted Australia’s high levels of household debt in a global report on financial stability.

Household debt is reaching its upper limits, while there are also limitations on how much people can rein in saving to sustain their spending, he added.

Still, Professor Harper noted that retail sales are only one component of consumption, which itself has been growing at a “respectable pace.”

More broadly, trends in the economy have been positive of late, with employment lifting in all states, even in depressed mining regions, while the outlook for investment is looking brighter, he said.

But progress in the economic recovery, which the RBA forecasts will soon produce on-year GDP growth rates of 3.0 per cent or more, is “painfully slow,” he said, with no signs of inflation or strong wage growth despite employment growth and a pick-up in investment.

The level of the Australian dollar also remains an inhibitor to growth, even after recent falls, Professor Harper said.

“You wouldn’t want to be jumping the gun and tightening too quickly,” he said.

Dow Jones Newswires