Reserve Bank open to more rate cuts, minutes show

The RBA has signalled it remains open to further cuts to interest rates, saying it has scope to act again if needed.

Generic pic of Reserve Bank of Australia building (RBA) at Martin Place in the Sydney CBD.

The Reserve Bank of Australia has left open the possibility that it might cut interest rates further, saying it has scope to act again if needed.

In minutes of its May board meeting, when it cut its cash rate target to a record low 2 per cent from 2.25 per cent, the RBA noted that it had not provided markets with forward-looking policy guidance at the time.

Still, it added, this would not limit its ability to adjust policy again at future meetings.

“Members agreed that ... the statement communicating the decision would not contain any guidance on the future path of monetary policy,” the minutes said.

“Members did not see this as limiting the board’s scope for action that might be appropriate at future meetings,” it added.

This is in line with comments by RBA deputy governor Philip Lowe yesterday that the central bank still had scope to move on rates, if deemed necessary.

The local currency dipped slightly on the release of the minutes. It dropped from US79.94c before the minutes were released to as low as US79.73c in the minute immediately after.

The RBA said the absence of policy guidance in May copied its approach in February when rates were lowered for the first time in well over a year. No guidance was present then. The RBA subsequently declared an easing bias in March.

The absence of policy guidance in May has prompted some economists to say the RBA had abandoned its easing bias, and a 2 per cent cash rate would mark the bottom of the current interest rate cycle.

The Australian dollar has since rallied back to its highest levels since January. In Asia yesterday, it was trading at close to US80c.

The RBA board considered delaying the interest rate cut in May until June, which would have given the RBA another month of economic data to sift, the minutes said.

Still, in the days after the policy meeting on May 5, it announced cuts to its GDP growth and inflation forecasts which helped to explain motives for the rate cut.

“With the revised staff forecasts scheduled to be released a few days after the meeting, members acknowledged that the challenges of communication might be more effectively met with a reduction in the cash rate at this meeting,” the minutes said.

The RBA said it remains concerned about the high Australian dollar, saying falls would be “necessary.”

The investment outlook also looks soft amid fears both mining and non-mining investment will be weaker than forecasts, it added.

The bank pointed to weakness in the Chinese economy and soft business investment in Australia as key areas of concern impacting monetary policy.

It also pointed to a gloomier economic growth forecast than was predicted in February.

“Compared with the previous set of forecasts, growth was now expected to take longer to strengthen and the unemployment rate was likely to remain elevated for longer,” the RBA minutes said.

House price growth in Sydney remains a concern, but more broadly, the national picture for house prices was now less threatening, the RBA said

“Members saw much more muted trends in other capital cities,” the minutes said.

On the positive side, the minutes reveal the RBA thinks that lower interest rates will boost household demand, which will flow through to more investment by firms.

The RBA also said that unusual trading in the Australian dollar, immediately prior to the board’s February, March and April decisions was the result of “normal market operations”.

With AAP