Garry Shilson-Josling, AAP Economist
(Australian Associated Press)
The Reserve Bank has made it clear what might induce it to cut the cash rate.
After his board’s monthly (except for January) get-together on Tuesday, the RBA governor Glenn Stevens issued his usual terse statement.
The meeting ended, as was widely expected, with no change in the cash rate but an acknowledgement that the key rate might be cut even further from its record low of 2.0 per cent, where it’s been since the latest cut in May.
The outlook for inflation, thanks largely to weak wages growth, has cleared the way.
“Continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand,” Mr Stevens said.
But there’s no guarantee the RBA will cut again.
For that, something would have to lead the RBA to the view that demand – in other words, the spending that drives production and employment – might need support.
And Mr Stevens made it clear what that something is most likely to be.
“Over the period ahead, new information should allow the Board to judge whether the recent improvement in labour market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand.”
So employment growth and the unemployment rate, key labour market indicators, will be crucial.
The Australian Bureau of Statistics’ figures for the period since the previous rate cut show employment growing at an average pace of 30,000 a month, outstripping growth in the working-age population by about 8,000 a month.
If it continues at that pace for another six months, then the unemployment rate, currently 5.8 per cent, will be nudging five per cent by mid-year.
If so, the conversation will then be turning to the timing of the next rate hike, not the possibility of a cut.
By highlighting the importance of trends in the labour market, the RBA is signalling either that it doubts the accuracy of ABS labour force figures, which have thrown up some decidedly odd results recently, or that it sees the real possibility of a slowdown this year.
Its reference to moderating growth in housing prices in Sydney and Melbourne may lie behind the perceived risk of a jobs market slowdown.
The other risk, which could also feed into a slower labour market, is the transmission of financial market turbulence to the global economy and then on to Australia.
But they are only risks at the moment, as the RBA’s own assessment of the economy shows.
The economy’s long-awaited transition away from growth led by mining investment is gathering momentum.
“In Australia, the available information suggests that the expansion in the non-mining parts of the economy strengthened during 2015 even as the contraction in spending in mining investment continued,” Mr Stevens said.
In other words, the economy is sticking to the script, for now at least, and as long as it does, there’s little chance of another rate cut.