RBA unlikely to cut cash rate

RESERVE Bank board members said a lift in the unemployment rate and stagnant inflation could warrant a cash rate cut, but conditions did not justify reducing it from a record low 1.5 per cent this month.

The minutes of the RBA’s April 2 meeting showed board members noted the labour market had strengthened in early 2019, though GDP growth had slowed beyond expectations.

“Members also discussed the scenario where inflation did not move any higher and unemployment trended up, noting that a decrease in the cash rate would likely be appropriate in these circumstances,” the minutes released yesterday said.

“(Members) recognised that the effect on the economy of lower interest rates could be expected to be smaller than in the past, given the high level of household debt and the adjustment that was occurring in housing markets.”

The board said it would continue to monitor the tensions between domestic GDP and labour market data, with a goal to support sustainable growth and achieve the inflation target over time.

It also said the likelihood of a higher cash rate in the near term was low, marking a dovish turn in policy compared with last month when it saw the risks for rates to move in either direction as more evenly balanced. The Australian dollar dropped on the release of the minutes at 11.30am, falling from 71.70 to 71.41 in the space of 45 minutes.

The RBA’s half-year report card on Friday said high household debt and shrinking economic growth were clouding Australia’s financial stability, while the property price slump in Sydney and Melbourne could lead to a renewed tightening of credit.

In the minutes the board said a lower interest rate could support the economy through a depreciation of the exchange rate and by reducing required interest payments on borrowing, freeing up cash for other expenditure. The cash rate, which influences all other interest rates, was last cut in August 2016 and hasn’t been hiked since November 2010.