RBA in a holding pattern

Minutes suggest existing stimulus to flow through

THE Reserve Bank remained committed to seeing through the effect of existing stimulus when the board met this month, even as members noted worsening global economic conditions and further monetary easing by other central banks.

The RBA held the cash rate at a record low 1.0 per cent two weeks ago.

Minutes from the board’s monthly meeting, released yesterday, show members discussed heightened US-Sino tensions and slowing Chinese growth.

Members noted a number of central banks had reduced interest rates in recent months and expected further easing.

The board kept the door open to further domestic easing against a backdrop of continued weak consumption and low wages, while members correctly anticipated a 0.5 per cent increase in GDP for the June quarter.

Members noted that the Federal Government’s tax offsets had so far failed to give retail spending a meaningful lift, although they expected this in the coming months.

While still flagging an extended period of low interest rates, they said an improving housing market and a resources sector pick-up were causes for optimism.

The RBA, which cut the cash rate by 0.25 percentage points in both June and July, indicated it could cut again to support growth and to eventually hit its inflation target.

JP Morgan economist Sally Auld said increasingly volatile global conditions – as well as domestic risks to the RBA’s “gentle turning point” narrative – made for a tricky set of circumstances for the RBA, under Governor Philip Lowe (left).

Even the stabilisation of the housing market, where strong price rises in August followed robust loan approvals in July, was not without drawbacks.

“While higher turnover is likely required to deliver positive effects on consumption, another month or two of strong growth in loan approvals and dwelling prices would likely make officials nervous about the re-emergence of risks relating to household leverage,” Ms Auld said.

Despite a deluge of weak domestic data in recent weeks, expectations of another rate cut before the end of this year have softened somewhat. The market has still fully priced in a cut to 0.75 per cent in December, with another to 0.5 per cent expected by mid-2020.

NAB economists last week said the RBA could cut to as low as 0.25 per cent by mid-2020 if the Federal Government continued to prioritise a budget surplus.