Minutes from the RBA’s monetary policy meeting shows that there is appetite among members for a rate cut as early as June.
The board ultimately left the cash rate unchanged at 1.5 per cent in May but the recent release of its minutes from that meeting suggest it was a close call.
“Members discussed the scenario where inflation did not move any higher and unemployment trended up, recognising that in those circumstances a decrease in the cash rate would likely be appropriate,” it read.
Members at the meeting said that the low level of interest rates over the recent years had supported economic activity and had contributed to the unemployment rate decline.
“However, household income growth had remained low and the March quarter inflation data indicated that the inflationary pressures in the Australian economy were lower than previously thought,” it said.
The RBA maintained that its main goals to reduce unemployment and return inflation towards the midpoint of the target but accepted it would be more gradual than before.
GDP growth had been revised to be lower in the near term but was still expected to be around 2.75 per cent over 2019 and 2020 with the unemployment rate to remain around 5 per cent in the same years.
RBA Governor Phillip Lowe said at a speech in Brisbane yesterday that this year reflected a greater probability of interest rate movement.
“In the face of conflicting signals, we judged that the best approach was to hold interest rates steady while we obtained a clearer picture of the direction of the economy,” he said.
Mr Lowe said that at the May meeting the members had discussed a scenario where the labor market had no improvement and unemployment remained at 5 per cent.
Members agreed that a further decline in the unemployment rate would be consistent with achieving Australia’s medium-term inflation target given international evidence.
“In the scenario where there was no further improvement in the labour market in the period ahead, recognising that in those circumstances a decrease in the cash rate would likely be appropriate,” said the RBA.
However, all of their forecasts are based on a central case forecast with risks forecast if there was a change to the base case in either direction.
“Members noted that the central forecast scenario was based on the usual technical assumption that the cash rate followed the path implied by market pricing, which suggested interest rates were expected to be lower over the next six months.
“This implied that, without an easing in monetary policy over the next six months, growth and inflation outcomes would be expected to be less favourable than the central scenario,” it said.
Domestically household consumption was an uncertainty with risks tilted to the downside due to low income growth and the recent housing market downside.
On the flip side, the RBA said it was possible that the combined effects may increase trade in Australia and an expected lift in disposable income may result in stronger growth in output.
The cash rate has so far remained unchanged since 2016 with the RBA noting that holding policy steady had enabled stability and confidence in recent years however members agreed to pay close attention for future changes.
“Members agreed that it was important to continue to pay close attention to developments in the labour market and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time.”
Mr Lowe said that in the meeting in two weeks’ time the members would consider the case for lower interest rates based on the data available.
“A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target.
“Given this assessment, at our meeting in two weeks' time, we will consider the case for lower interest rates,” he said.
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