RBA lays groundwork for February cut

Alex Druce
(Australian Associated Press)


Reserve Bank board members acknowledged the nation’s spending freeze could in part be down to a routine lag in monetary policy but signalled the central bank is prepared to cut to a fresh low of 0.5 per cent when it reconvenes in February.

Minutes from the RBA’s monthly meeting on December 3 showed board members noted monetary policy had “long and variable lags” and that indebted consumers may take some time before increasing their spending in response to three 0.25 per cent rate cuts over the past six months.

Economists however seized on board members’ comments that it would be “important to reassess the economic outlook” when it next meets in February and prepares updated forecasts.

A fourth cut in nine months is widely expected after the summer recess as the central bank seeks to stimulate an economy sagging under the weight of rising unemployment, stagnant wages and poor business investment.

Coupled with board members’ acknowledgement that the RBA could “provide further stimulus to the economy if required,” RBC strategist Robert Thompson said the RBA’s pledge to take stock carried significant weight.

“(It) looks a little portentous as we look to the next meeting in February,” he said.

December’s board meeting preceded the release of more lacklustre retail and GDP figures, while Thursday’s employment data is also expected to be tepid.

Just this week Treasurer Josh Frydenberg was forced to slash his economic growth forecast for 2019/20 to 2.25 per cent, from 2.75 per cent, blaming weak momentum in the global economy, as well as domestic challenges such as the effects of drought and bushfires.

Wage growth is now not expected to reach three per cent until 2022/23, while the unemployment rate is forecast to be higher than hoped at 5.25 per cent, rather than five per cent for this financial year and next.

December’s RBA minutes show members discussed household expectations about future economic conditions had declined significantly since June – driven by a prolonged period of slow income growth – but also coinciding with “an increasingly negative tone in news coverage of the economy”.

RBA deputy governor Guy Debelle called the media out last month when he urged patience to let recent stimulus measures take effect.

“It is a question of instantaneous gratification and, as much as it’s desirable very much in this day and age, and particularly by the media, monetary policy takes a while to get through,” Mr Debelle said at a FINSIA event in Sydney.

Members again acknowledged the negative confidence effects arising from lower interest rates, but judged that the impact of these effects was unlikely to outweigh the stimulus to the economy from rate cuts.

Mr Thompson said it was, however, hard to agree with members’ assessment that the employment market had shown “little change since earlier in the year”.

“Given employment generation has clearly weakened and lead vacancy indicators continue to soften, we’d give a more downbeat summary,” he said.

The economy lost 19,000 jobs in October alone for the workforce’s worst month in three years, with the unemployment rate rising to 5.3 per cent.

Jobs figures for November will be published on Thursday.


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