Rates inaction a close call

Minutes show RBA came close to cutting again

RESERVE Bank board members acknowledged there was a case for cutting the cash rate to a new record low before leaving it unchanged at 0.75 per cent at this month’s board meeting.

Minutes from the RBA’s meeting on November 5 show board members noted declining retail sales, a weaker outlook for household income and wages, and that inflation and GDP growth had both come in below forecast last year.

However, members agreed that further evidence on spending by households was required before drawing any conclusions about the effectiveness of its three rate cuts since June, or tax rebates.

“Having already delivered a substantial monetary stimulus in recent months, there was a case to wait and assess the effects of this stimulus, especially given the long and variable lags,” read the minutes released yesterday.

Members judged that, while the board’s three 25-basispoint cuts since June had helped lower the exchange rate, lift asset prices and deliver higher cash flows for borrowers, savers and confidence had been hurt.

They also discussed the possibility that a further reduction in interest rates could have a different effect on confidence than in the past, when interest rates were at higher levels.

The minutes follow last week’s call by deputy governor Guy Debelle (pictured) for patience on monetary policy.

Philip Lowe’s deputy told a Sydney audience on Friday that, despite disquiet over sluggish retail activity, rising unemployment and stagnant wage growth, it was too early to judge the impact of this year’s three cash rate cuts.

The minutes showed board members noted wages growth was not likely to accelerate beyond recent subdued forecasts, reflecting the views of most firms in the RBA’s liaison program.

New enterprise bargaining agreements are still generally delivering lower wage outcomes than the agreements they were replacing, while public sector wages growth was also expected to be constrained due to government caps on wage increases.

“A further gradual lift in wages growth would be a welcome development and was needed for inflation to be sustainably within the 2-3 per cent target range,” the minutes said.

Weaker September quarter retail volumes suggested to the board that consumption growth was likely to have remained stagnant despite tax offset payments and its rate reduction in October.