RBA ready to cut – if needed

Interest rates written with wooden letters on rustic wooden surface

Garry Shilson-Josling, AAP Economist


(Australian Associated Press)

If things turn out as expected, the Reserve Bank of Australia won’t be cutting interest rates again; but things don’t always turn out as expected.

That’s why the central bank would never rule out another rate cut, and it’s made a point of leaving its options open in the minutes of its board’s latest policy meeting.

The RBA was upbeat about the economy, in the minutes of the December 1 meeting.

In fact, it was so upbeat that it appears reasonably confident it will not need to give the economy another shot in the arm by lowering the cash rate from its record low of 2.0 per cent, where it’s been since the latest cut in May.

But it has the syringe ready, just in case.

The recent run of economic figures had been positive, with low interest rates encouraging households to consume as well as invest in housing, while conditions outside the mining sector had picked up and employment growth had strengthened, the RBA said.

“Even so, (board) members recognised that there was still evidence of spare capacity in the economy, including in the labour market,” the RBA said in the minutes.

As evidence, the RBA cited low wages growth, even in faster-growing sectors where wage inflation might normally be expected to pick up.

“The latest data suggested that wage growth had been little changed in the household services sector, where employment growth had been strongest.”

The RBA also said moves by the Australian Prudential Regulation Authority had been partly responsible for an easing in home price rises in Sydney and Melbourne.

So, the usual hurdles between the RBA and another rate cut – consumer and asset price inflation – are currently low.

And, that means if the economy falls below the RBA’s forecast growth path, another rate cut could be a real option.

And that’s easily possible.

That’s not an indictment of the RBA, just a fact of life for anyone trying to forecast economic growth over the medium term.

Which is why the RBA said in the minutes that there was “some scope for a further easing” if it turns out the economy needs it.


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