RBA Says Further Rate Cut ‘More Likely Than Not’ in Period Ahead

(Bloomberg) -- Australia’s central bank is likely to lower interest rates again to drive increased hiring and boost households’ confidence that inflation will return to target.

The Reserve Bank made the comment in minutes of its June 4 policy meeting, when it eased the cash rate to 1.25% in the first reduction in almost three years. The report was released in Sydney Tuesday.

“Given the amount of spare capacity in the labor market and the economy more broadly, members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead,” policy makers said. “They also recognized, however, that lower interest rates were not the only policy option available to assist in lowering the rate of unemployment.”

In a speech following the rate cut, RBA Governor Philip Lowe warned against over-reliance on monetary policy, saying that infrastructure investment and structural reforms could also help speed economic growth.

The Australian dollar fell after Tuesday’s report, buying 68.45 U.S. cents at 12:32 p.m. in Sydney, compared with 68.57 cents before its release.

RBA Says Further Rate Cut ‘More Likely Than Not’ in Period Ahead

The central bank is again homing in on inflation, acknowledging it has remained below target for three years and could start to impact household expectations. When he took the helm in 2016, Lowe said RBA officials aren’t “inflation nutters” and were focused on boosting financial system resilience through better lending standards and deflating asset prices.

“The inflation target plays an important role as a strong medium-term anchor for inflation expectations, to help deliver low and stable inflation, which in turn supports sustainable growth in employment and incomes,” the board said in Tuesday’s minutes.

The central bank again spelled out that its growth, inflation and employment outlook were based on market expectations that rates would be lower in the period ahead.

“The July meeting is clearly live, but we marginally favor August for the next 25 basis-point cut because it coincides with the Statement on Monetary Policy,” said Gareth Aird, senior economist at Commonwealth Bank of Australia, referring to the RBA’s quarterly update of economic forecasts. “Back-to-back rate cuts may have a negative impact on household confidence.”

Commonwealth updated its RBA forecast earlier today and now sees two reductions -- in August and November -- to take the cash rate down to 0.75%.

Debt Risk

The RBA board was also confident that the easing wouldn’t undo the past three years’ work: “members judged that a decline in interest rates was unlikely to encourage a material pick-up in borrowing by households that would add to medium-term risks in the economy.” Australia’s household debt currently stands at a record high.

Policy makers reiterated that they expected lower rates to stimulate the economy through the currency, cheaper business borrowing costs and reduced mortgage payments. Household spending -- which accounts for almost 60% of GDP -- has slowed sharply amid a nation-wide property slump.

The central bank said data received for the June quarter and indicators of future activity “had been mixed.” It also said employment growth was likely to moderate a little, based on liaison with firms and other forward indicators.

The RBA is now targeting unemployment of 4.5% to try to rekindle inflation, down from the 5% it had previously estimated as full employment.

©2019 Bloomberg L.P.

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