Reserve Bank ready to cut rates further if needed

The RBA is willing to lower interest rates further if necessary with broad agreement that policy should be “accommodative”.

The Reserve Bank of Australia continues to signal its willingness to lower interest rates further if necessary, saying in minutes of its June 2 policy meeting that it will look to incoming data to assess whether policy settings are correct.

The minutes, published this morning, said there was broad agreement on the board that the stance of policy “should be accommodative”.

“Members judged that it was appropriate to leave the cash rate unchanged and to assess information on economic and financial conditions as it became available,” the minutes said. “These data would inform the board’s assessment on the state of the economy,” it added.

The publication of the minutes comes a week after RBA governor Glenn Stevens said he was open to lowering interest rates further if conditions warranted.

Still, Mr Stevens also warned about the risks associated with relying too much on monetary policy to lift the economy out of its current slump, pointing to the “crazy” pace of house price growth in Sydney as one warning sign.

He called for more government infrastructure spending and business investment to fan recovery.

Overnight, RBA assistant governor (Economic), Chris Kent, said that the lever of interest rates still works.

“Monetary policy is clearly working to support demand, although it is working against some strong headwinds,” he told an audience in Canberra.

Rates have been lowered twice this year to a record low 2 per cent as the RBA has moved to support economic growth, ease upward pressure on the Australian dollar, and head off a rise in unemployment.

The RBA expects the economy to grow at a sub-par rate for a while yet as commodity price falls continue to slam confidence and income growth. Mr Stevens said last week rate increases were not being contemplated.

The drop to record lows in rates after cuts in February and May has prompted some economists to say the effectiveness of monetary policy is waning.

Even Mr Stevens said last week that cutting rates further might lack the effect it had previously.

“It is not that monetary policy is entirely powerless, but its marginal effect may be smaller, and the associated risks greater, the lower interest rates go from already very low levels. I think everyone can see that,” Mr Stevens told economists in Brisbane.

Australia’s treasury secretary John Fraser also warned at the start of the month that a house price bubble was evident in Sydney and parts of Melbourne, adding to risks for the economy.

The meeting minutes pointed to possible factors that might trigger a further cut in interest rates over time, such as ongoing low inflation; spare capacity in the job market; and divergent trends in non-mining business investment.

The minutes noted that recent steps by the bank regulator to curb excessive lending to property investors will take time to work.

Around half of all mortgages are being written for property investors, a market dynamic that has worried the central bank for some time.

“It would take time for the full effects of such changes to be evident in the housing loan approvals and credit data,” it said.