RBA Minutes Indicates Data- Dependence in Future Policy. Further Rate Cuts Likely Given Limited Decline in Unemployment Rate

Central banks news

RBA’s minutes for the August meeting indicated that future monetary policy action would be data-dependent. While acknowledging some improvements in the economic developments after the two consecutive rate cuts, spare capacity in the labor market remained significant. The country’s unemployment rate would stay above the longer-term target for some more time. Downward revision in GDP growth and inflation forecasts suggested that RBA would cut interest rates further in coming months. RBA left the cash rate unchanged at 1% in August.

On domestic economic developments, the central bank noted some improvements after previous rate cuts. It cautioned, however, that risks were “titled to the downside in the near term”. While acknowledging stronger than expected employment growth and higher participation rate, the members were concerned that “the unemployment rate had increased and there appeared to have been more spare capacity in the labour market than previously appreciated“. Housing market “strengthened” prices improved in Sydney and Melbourne. However, the central bank judged that “it could take some time for the stabilisation of conditions in the established housing market to translate into a pick-up in construction activity”. It added that “dwelling investment was likely to decline further in the near term”, as reflected in leading indicators.

Globally, economic growth “remained reasonable” but “risks to the outlook remained tilted to the downside”. Growth of Australia’s trading partners has been revised slightly lower “in light of the escalation of the US–China trade and technology disputes and the related weakness in indicators of investment”. The members also noted that “commodity prices had generally fallen since the previous meeting” as a result of escalation of US-China trade war.

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The members noted that they would assess developments in the global and domestic economies before considering further change to the setting of monetary policy. On the monetary policy outlook, further easing would be considered if “the accumulation of additional evidence suggested this was needed to support sustainable growth in the economy and the achievement of the inflation target over time”.

At the August Statement of Monetary Policy, released on August 9, RBA revised lower growth and inflation forecasts contingent. Despite the back- to – back rate cuts in June and July, the unemployment rate is still expected to stay significantly below its 4.5% target through its forecast horizon. As such, it is highly likely that RBA would have to adopt further rate cuts in coming months.

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