RBA noted global gloom while holding rate

Alex Druce
(Australian Associated Press)


The Reserve Bank remained committed to seeing through the effect of existing stimulus when the board met this month, even as members noted worsening global economic conditions and further monetary easing by other central banks.

The RBA held the cash rate at a record low 1.0 per cent two weeks ago and minutes from the board’s monthly meeting released on Tuesday showed members discussed heightened US-Sino tensions and slowing Chinese growth.

Members noted a number of central banks had reduced interest rates over recent months and expected further monetary easing.

The board kept the door open to further domestic easing against a backdrop of continued weak consumption and low wages, while members correctly anticipated a 0.5 per cent increase in GDP for the June quarter.

Members noted the federal government’s tax offsets had so far failed to give retail spending a meaningful lift, though they expected this to materialise in the coming months.

While still flagging an extended period of low interest rates, they said an improving housing market and a resources sector pick-up were causes for optimism.

The RBA, which cut the cash rate by 0.25 percentage points in both June and July, indicated it could cut again to support sustainable growth and to eventually hit its inflation target.

JP Morgan economist Sally Auld said increasingly volatile global conditions – as well as domestic risks to the RBA’s “gentle turning point” narrative – made for a tricky set of circumstances.

Even the stabilisation of the housing market, where strong price rises in August followed robust loan approvals in July, was not without drawbacks.

“While higher turnover is likely required to deliver positive effects on consumption, another month or two of strong growth in loan approvals and dwelling prices would likely make officials nervous about the re-emergence of risks relating to household leverage,” Ms Auld said.

Despite a deluge of weak domestic data in recent weeks, expectations of another rate cut before the end of this year have softened somewhat.

The market has still fully priced in a cut to 0.75 per cent in December, with another cut to 0.5 per cent widely expected by mid-2020.

NAB economists last week said the RBA could cut to as low as 0.25 per cent by mid-2020 if federal government continued to prioritise its “political objective” of a budget surplus.

RBC Capital Markets’ Su-Lin Ong maintains the next reduction will be in November.

“The timing, as always, is tricky with global developments keeping pressure on the RBA,” Ms Ong said.

“However, we continue to favour November for the next move largely based on domestic considerations with domestic data, especially the policy sensitive numbers – confidence, lending, house prices – mixed.”

Economists expect the Reserve Bank to downgrade its growth outlook once again in its November Statement on Monetary Policy after GDP growth eased to its slowest pace of expansion since the GFC in the June quarter.


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