RBA considered shock Melbourne Cup rate cut, board minutes reveal

The RBA considered a surprise rate cut amid softening economic data, it’s been revealed.

The RBA pondered what would have been a fourth interest rate cut since June, its minutes reveal. Picture: SSP

The Reserve Bank considered a surprise rate cut at its Melbourne Cup day policy meeting, but ultimately decided to wait and see how its three cuts since June would work their way through the economy, the bank’s board minutes reveal.

“The board agreed that a case could be made to ease monetary policy at this meeting, but that the most appropriate approach would be to maintain the current stance of monetary policy and to make another full assessment once more evidence of the effects of the earlier monetary easing had become available,” the minutes, released Tuesday morning, read.

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In response to weaker domestic growth and a global turn towards easier policy – led by the US Federal Reserve – the RBA eased its official cash rate by 0.25 percentage points in June and July, and then again in October, bringing it to a record low of 0.75 per cent.

The minutes reiterated the bank’s official view that the economy “had reached a gentle turning point” after a sharp and unexpected deceleration through the second half of 2018, which has been followed by only a mild recovery this year.

The RBA minutes noted that, since the lows of last year, growth had “picked up a little and was expected to have been moderate in the September quarter”.

The RBA also repeated its base case forecast that GDP growth would “strengthen gradually” to 2.75 per cent over 2020 and around 3 per cent in 2021.

“This outlook was expected to be supported by accommodative monetary policy, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a pick-up in mining investment.”

An easing of trade tensions between the US and China has improved the mood around global growth prospects. Members noted, however, that “an important domestic uncertainty continued to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending”.

The board members noted the fall in retail sales volumes in the September quarter, “which suggested that consumption growth was likely to have remained subdued in recent months despite the tax offset payments and the reductions in interest rates”.

Reserve Bank of Australia Governor Philip Lowe. Picture: AAP

The RBA board’s broadly upbeat assessment of the labour market – of steady unemployment and 2.5 per cent annual jobs growth – has been superseded by subsequent official data showing a surprise loss of 19,000 jobs in October, which nudged the jobless rate up to 5.3 per cent and reduced annual jobs growth to 2 per cent.

“The latest wages and employment data were soft,” CBA senior economist Gareth Aird said. “And the RBA is clearly considering the case to ease monetary policy further.”

Mr Aird predicts another rate cut in February – a view that is close to a consensus among financial sector economists.

Still, RBA officials remain wary of diminishing impact of lower rates, and in particular around the potential damage cutting rates from already low levels may have on confidence.

“While members judged that lower interest rates were supporting the economy through the usual transmission channels (including a lower exchange rate, higher asset prices and higher cash flows for borrowers), they recognised the negative effects of lower interest rates on savers and confidence.

“They also discussed the possibility that a further reduction in interest rates could have a different effect on confidence than in the past, when interest rates were at higher levels.”

But the bank remains ultimately confident of monetary policy’s ability to drive growth and spending, given time.

Deputy governor Guy Debelle last week during an event in Sydney argued it was too early to gauge the economic ­impact of this year’s trio of rate cuts and there is “no evidence” monetary easing won’t prove stimulatory, given time.

The transmission of lower rates through to the housing market remains clearly evident in climbing home prices, particularly in Sydney and Melbourne. On Tuesday morning, CBA’s household spending intentions gauge showed a “sharp increase in home buying intentions” continued into October and is now approaching the record highs of early 2017, suggesting prices will continue to climb into next year.

“Beyond housing, the overall picture is one of a gentle upturn in spending intentions,” the bank said.