(Australian Associated Press)
Further cuts to the cash rate are “more likely than not”, according to Reserve Bank board members.
Minutes from the RBA’s monthly board meeting two weeks ago showed members believe that a further easing would probably be required in addition to June’s 0.25 percentage point cut as the central bank tries to boost sluggish economic growth.
The minutes released Tuesday spelled out the RBA’s dovish stance and its hope that dropping the cash rate, initially to 1.25 per cent, would lift GDP growth by lowering the exchange rate, reducing borrowing costs for businesses, and lowering interest payments on household lending.
Economists said the minutes lent further credence to the theory that the RBA was on track to cut again in August, although a move next month can’t be ruled out.
Many, including JP Morgan’s Tom Kennedy, predict a further reduction to leave the cash rate at 0.75 per cent by the end of 2019 before a cyclical low 0.5 per cent next year.
“We doubt 50 basis points of easing will be sufficient to resolve the issues facing the Australian economy,” Mr Kennedy said.
The futures market suggests a 50 per cent chance of a July cut, with a 0.25 percentage point cut almost fully priced in by August.
UBS is still flagging cuts in August and February but noted that Tuesday’s speech by Jonathan Kearns, in which the RBA’s head of financial stability discussed rising mortgage arrears, suggested the situation could change.
“Comments today that ‘arrears rates should not rise to levels that pose a risk to the financial system’, ‘so long as unemployment remains low’, suggest that if unemployment were to rise more than we currently expect, it would raise the risk of more and earlier easing,” UBS economists said in a note.
June’s cut – the first move in any direction since August 2016 – followed another month of weak economic data, most notably an unexpected rise in the unemployment rate for April to a seasonally adjusted 5.2 per cent.
The minutes confirmed the RBA will monitor the jobs market as it mulls the timing of any further cuts and expects unemployment, which last week was shown to have remained steady in May, to decline just “a little” over its forecast period.
“A lower level of the cash rate would assist in reducing spare capacity in the labour market, providing more Australians with jobs and greater confidence that inflation will return to be comfortably within the medium-term target range in the period ahead,” said the minutes released on Tuesday.
“Given the amount of spare capacity in the labour 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.”
The Australian dollar dropped 0.25 per cent against its US counterpart in the moments after the release of the minutes and, after a brief consolidation, fell again to a more than five-month low 68.33 US cents.
RBA members noted the pickup in housing auction clearance rates that followed the federal election and proposed changes by the Australian Prudential Regulation Authority, which could increase the amount people can borrow to buy homes.
But they also were mindful that construction activity – a key component of the economy – remained sluggish as building approvals declined further in April for a 12-month fall of 20 per cent.
“This suggested that, even if there were a marked turnaround in housing sentiment, given the lags involved it would take some time for this to translate into higher residential construction activity,” the minutes said.