RBA hones rate-cut knife

Bank’s December minutes point to further easing

RESERVE Bank board members acknowledged the nation’s spending freeze could in part be down to a routine lag in monetary policy but signalled the central bank was prepared to cut to a fresh low of 0.5 per cent when it reconvenes in February.

Minutes from the RBA’s monthly meeting on December 3 show the board, under governor Philip Lowe (pictured), noted monetary policy had “long and variable lags” and that indebted consumers might take time to increase spending in response to three 0.25 per cent rate cuts in the past six months.

Economists however seized on board members’ comments that it would be “important to reassess the economic outlook” when it next meets in February and prepares updated forecasts.

A fourth cut in nine months is widely expected after the summer recess as the central bank seeks to stimulate an economy sagging under the weight of rising unemployment, stagnant wages and poor business investment.

Coupled with board members’ acknowledgment that the RBA could “provide further stimulus to the economy if required”, RBC strategist Robert Thompson said the RBA’s pledge to take stock carried significant weight.

“(It) looks a little portentous as we look to the next meeting in February,” he said.

December’s board meeting preceded the release of more lacklustre retail and GDP figures, while tomorrow’s employment data is also expected to be tepid. Just this week Treasurer Josh Frydenberg was forced to slash his economic growth forecast for 2019-20 to 2.25 per cent, from 2.75 per cent, blaming weak momentum in the global economy, as well as domestic challenges such as the effects of drought and bushfires.

Wage growth is now not expected to reach 3 per cent until 2022-23, while the unemployment rate is forecast to be higher than hoped at 5.25 per cent, rather than 5 per cent, for this financial year and next.

The minutes show that members said household expectations about future economic conditions had declined significantly since June – driven by a prolonged period of slow income growth – but also coinciding with “an increasingly negative tone in news coverage of the economy”.

Members again acknowledged the negative confidence effects arising from lower interest rates, but judged that the impact of these effects was unlikely to outweigh the stimulus to the economy from the rate cuts.