Australia holds rate but ready to cut further if needed

August 6, 2019

By CentralBankNews.info

Australia’s central bank left its benchmark cash rate steady at 1.0 percent, as expected, and said it would “ease monetary policy further if needed to support economic growth and the achievement of the inflation target.”
The Reserve Bank of Australia (RBA), which cut its cash rate in June and July by a total of 50 basis points, also lowered its outlook for inflation to “be a little under 2 percent over 2020” as compared with its forecast from last month that inflation would be “around” 2 percent in 2020.
For 2021 RBA still expects inflation to be a little above 2.0 percent. The RBA targets inflation of 2.0 to 3.0 percent and in July Australia’s inflation rate rose to 1.6 percent from 1.3 percent.
In today’s statement, the RBA board is transparent and open about its willingness to lower rates further, a departure from last month when it said it was willing to “adjust monetary policy if needed.”
In addition to lowering its outlook for inflation, the RBA echoed Governor Philip Lowe’s speech from last month in Sydney that was widely seen as a the first use of “forward guidance” by the RBA.
“It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target,” the RBA said today.
In his speech on July 25, Lowe also said “it is reasonable to expect an extended period of low interest rates” whether of not further monetary easing is needed.
Following the 2007-2009 Global Financial Crises when interest rates were slashed to essentially zero, central banks such as the Federal Reserve, the Bank of England and the European Central Bank began employing forward guidance as a regular part of their monetary tool box.
By signaling the likely course of future monetary policy to financial markets and businesses, central banks increased the transparency and thus efficiency of their monetary policy.
In its commentary on the global economy, the RBA reiterated that the outlook “remains reasonable,” but the risks remain tilted to the downside due to uncertainty from trade and technology disputes that are affecting investments.
RBA also acknowledged that economic growth in Australia has been lower than it had expected in the first half of this year but it expects growth to strengthen from here, with the central scenario for the country’s economy to grow around 2.4 percent this year and 2.75 percent in 2020, supported by low interest rates, recent tax cuts, spending on infrastructure, a brighter outlook for the resources sector and signs of stabilization in the housing market.
In the first quarter of this year Australia’s gross domestic product grew by 1.8 percent year-on-year, down from 2.3 percent in the previous quarter.
Australia’s dollar firmed today in response to the RBA’s statement and was trading around 1.47 to the U.S. dollar, up from 1.48 yesterday, but down 3.4 percent this year.

The Reserve Bank of Australia issued the following statement:

“At its meeting today, the Board decided to leave the cash rate unchanged at 1.00 per cent.
The outlook for the global economy remains reasonable. However, the increased uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy remain tilted to the downside. In most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. The slowdown in global trade has contributed to slower growth in Asia. In China, the authorities have taken steps to support the economy, while continuing to address risks in the financial system.
Global financial conditions remain accommodative. The persistent downside risks to the global economy combined with subdued inflation have led a number of central banks to reduce interest rates this year and further monetary easing is widely expected. Long-term government bond yields have declined further and are at record lows in many countries, including Australia. Borrowing rates for both businesses and households are also at historically low levels. The Australian dollar is at its lowest level of recent times.
Economic growth in Australia over the first half of this year has been lower than earlier expected, with household consumption weighed down by a protracted period of low income growth and declining housing prices. Looking forward, growth in Australia is expected to strengthen gradually from here. The central scenario is for the Australian economy to grow by around 2½ per cent over 2019 and 2¾ per cent over 2020. The outlook is being supported by the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some housing markets and a brighter outlook for the resources sector. The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income and a stabilisation of the housing market are expected to support spending.
Employment has grown strongly over recent years and labour force participation is at a record high. There has, however, been little inroad into the spare capacity in the labour market recently, with the unemployment rate having risen slightly to 5.2 per cent. The unemployment rate is expected to decline over the next couple of years to around 5 per cent. Wages growth remains subdued and there is little upward pressure at present, with strong labour demand being met by more supply. Caps on wages growth are also affecting public-sector pay outcomes across the country. A further gradual lift in wages growth would be a welcome development. Taken together, recent labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.
The recent inflation data were broadly as expected and confirmed that inflation pressures remain subdued across much of the economy. Over the year to the June quarter, inflation was 1.6 per cent in both headline and underlying terms. The central scenario remains for inflation to increase gradually, but it is likely to take longer than earlier expected for inflation to return to 2 per cent. In both headline and underlying terms, inflation is expected to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.
Conditions in most housing markets remain soft, although there are some signs of a turnaround, especially in Sydney and Melbourne. Growth in housing credit remains low. Demand for credit by investors continues to be subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.
It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments in the labour market closely and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”

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