More rate cuts are likely

RBA indicates further easing in monetary policy

RESERVE Bank of Australia board members agreed that further reductions to the cash rate were “more likely than not” when they cut it to a record low 1.25 per cent this month.

Minutes from the RBA’s June 4 meeting show members agreed that a further easing in monetary policy would be likely as the central bank tries to stimulate the economy through lowering the exchange rate, reducing borrowing costs for businesses, and lowering interest payments on loans to households.

The minutes confirmed the RBA, under governor Philip Lowe (right) would monitor the jobs market as it considered any further cuts.

“A lower level of the cash rate would assist in reducing spare capacity in the labour market, providing more Australians with jobs and greater confidence that inflation will return to be comfortably within the medium-term target range in the period ahead,” said the minutes, released yesterday. “Given the amount of spare capacity in the labour market and the economy more broadly, members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead.”

Capital Economics economist Ben Udy said the comments suggested the RBA was on track to cut again in August, and possibly as soon as July, before making a third reduction to leave the cash rate at 0.75 per cent by the end of 2019. The Australian dollar dropped 0.25 per cent against its US counterpart in the moments after the release of the minutes to a more than fivemonth low of 68.40 US cents.

The central bank’s first move in any direction since August 2016 followed another month of weak economic data, most notably an unexpected rise in the unemployment rate for April to a seasonally adjusted 5.2 per cent.

The minutes showed the RBA expects unemployment, which turned out to have remained steady in May, to decline just “a little” over its forecast period. Members did, however, correctly anticipate March quarter GDP growth to have firmed compared to the preceding two quarters when data was released on June 5. But the 0.4 per cent expansion turned out to be softer than the market had expected.

RBA members noted the pick-up in housing auction clearance rates that followed the federal election and proposed changes by the Australian Prudential Regulation Authority, which could increase the amount people can borrow to buy homes.