RBA sends ‘unusual’ signal to market.
The central bank has conceded that further rate cuts are “more likely than not” in minutes released following its first monetary policy adjustment in almost three years.
Following the Reserve Bank of Australia’s (RBA) decision to lower the official cash rate to a new record low of 1.25 percent, governor Philip Lowe said that it was “not unreasonable” to expect additional cuts throughout 2019 amid weaker-than-expected GDP growth.
The central bank conceded that additional rate cuts would be appropriate given the amount of spare capacity in the labor market and economy.
ANZ’s head of Australian economics, David Plank believes that central bank’s admission was an unusually strong signal which should be clearly taken note of.
The RBA board members also agreed that in determining the next monetary policy adjustment, specific reference to the developments in the labour market is important.
The latest labour market figures, released weeks after the RBA’s adjustment, revealed that despite a sharp increase in the number of employed persons, the unemployment rate remained stable at 5.2 per cent.
Mr. Plank observed that “ the continuation of significant slack in the labour market seems likely to persist for some time.” He added that the RBA’s minutes suggest the central bank is considering pursuing an aggressive agenda to stimulate the labour market.
The Economist also added that although the governor doesn’t think the cash rate will fall as low as that seen in many other countries, this policy approach suggests the RBA thinks it will likely be doing something non-conventional very soon.
The RBA’s June cash rate announcement prompted an immediate response from the market, with several lenders, including the big four banks, passing on the reduction to their mortgage customers.
The reduction also sparked a wave of cuts to savings rates and has resulted in a reduction in the value of the Australian dollar.
Some observers have interpreted the RBA’s decision as a sign that the economy could be at risk of falling into recession amid internal and external headwinds.
Treasurer Josh Frydenberg has acknowledged that “international challenges” could pose a threat to the domestic economy. Fears of a looming recession have prompted some observers, including the CEO of Neobank Xinja, Eric Wilson, to encourage borrowers to pocket mortgage rate cuts to help build a buffer against downside risks.
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