RBA focus is on stability Next move up as political uncertainty stays hand

AUSTRALIA’S central bank is seeking to be “a source of stability and confidence” by keeping rates at record lows amid political uncertainty.

The Reserve Bank of Australia Board, under Governor Philip Lowe (pictured), agreed the next move in the cash rate would more likely be an increase, minutes of its August 7 policy meeting show. But the RBA stressed that keeping rates at 1.5 per cent would help reduce the jobless rate and lift wage growth over time.

“Since progress on unemployment and inflation was likely to be gradual, (members) agreed there was no strong case for a near-term adjustment in monetary policy,” the minutes stated.

“Rather, members assessed it would be appropriate to hold the cash rate steady and for the Bank to be a source of stability and confidence while this progress unfolds.”

The RBA sounded more upbeat about the economy, citing recent strength in the labour market and strong business confidence. A source of stability would be timely as growing political uncertainty takes its toll.

A gauge of consumer confidence fell sharply for a third straight week, with falls across all sub-indices.

“The decline ... may reflect the impact of the messy political debate locally and the associated slump in support for the current Turnbull Government,” ANZ head of Australian economics David Plank said.

Mr Turnbull yesterday survived a leadership challenge by Home Affairs Minister Peter Dutton but the narrow margin of the win has sparked speculation about his future. No Australian prime minister has completed a full three-year term in the past decade.

“This type of political instability impacts business investment decisions and in turn hiring decisions. And that then has an impact on consumption,” said Greg McKenna, market strategist at AxiTrader.

“If this intensifies, if it becomes real, then it will definitely weigh.”

The RBA last cut rates to 1.5 per cent in August 2016, and financial markets are wagering this steady period could extend into 2020.

The bank spent some time discussing the effects of a severe drought.

“Members noted that the probability of an El Nino event, which would typically be associated with low rainfall in eastern Australia, had increased over 2018, implying downside risks to the forecasts for farm output and exports,” it said. Farming produces about 2 per cent of Australia’s $1.8 trillion GDP.