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RBA doesn’t rule out cutting rates further

RBA doesn’t rule out cutting rates further

— 1 minute read

The RBA has revealed the factors behind the July cash rate decision and has left the door open to further changes in the near term. 

The Reserve Bank lowered the cash rate by 25 basis points in July to the historically low 1.00 per cent, after cutting it the month before as well. 

In its minutes released on Tuesday, the RBA said that the labour market was the primary factor behind the cut as wage growth remained low. 

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“Although there had been a modest pick-up in wages growth in the private sector, wages growth had remained low overall. In combination, these factors suggested that spare capacity was likely to remain in the labour market for some time,” said RBA governor Philip Lowe. 

Mr Lowe said higher growth in disposable income was expected to support consumption but that outlook was uncertain, despite the short term growth thanks to the tax offset. 

Employment growth continued to outpace growth, but most of that strength was met by an increase in participation rather than a decline in unemployment rate, said Mr Lowe. 

Declining house prices had also led to low growth in consumption and mortgage rates were at record lows with strong competition for borrowers of high credit quality. 

“However, demand for credit by investors continued to be subdued and credit conditions for small and medium-sized businesses remained tight,” Mr Lowe said.

Members agreed that further improvements in the labour market would be required for a more positive inflation outlook. 

“As assessed at the previous meeting, members agreed that the Australian economy could sustain a lower rate of unemployment while achieving inflation consistent with the target,” he said. 

In the current environment, the main channels through which lower rates would support the economy were of lower value, admitted Mr Lowe. 

“In the current environment, the main channels through which lower interest rates would support the economy were a lower value of the exchange rate than otherwise would be the case and lower required interest payments on borrowing, which would free up cash for other expenditure by households and businesses,” he said. 

But members judged that a further reduction in interest would support the necessary growth in employment and incomes while promoting stronger economic conditions. 

“Members also judged that the extent of spare capacity in the economy, and the likely pace at which it would be absorbed, meant that a decline in interest rates was unlikely to encourage an unwelcome material pick-up in borrowing by households that would add to medium-term risks in the economy,” he said. 

The July decision, together with the previous cut, would assist in reducing that capacity and making faster progress in reducing the unemployment, and the rate could go lower. 

“Lower interest rates would provide more Australians with jobs and assist with achieving more assured progress towards the inflation target. 

“The board would continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time,” said Mr Lowe.  

 

RBA doesn’t rule out cutting rates further
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Eliot Hastie

Eliot Hastie

Eliot Hastie is a journalist at Momentum Media, writing primarily for its wealth and financial services platforms. 

Eliot joined the team in 2018 having previously written on Real Estate Business with Momentum Media as well.

Eliot graduated from the University of Westminster, UK with a Bachelor of Arts (Journalism).

You can email him on: [email protected]

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