The RBA stuck to its growth forecasts when it held the cash rate at a record low 1.5 per cent at its most recent board meeting, but a reassessment looks even more likely after the December minutes showed members worrying over tightening credit and sluggish consumption.
The minutes released Tuesday said Reserve Bank board members still believed the next move in the cash rate was more likely to be up than down, but low income growth, high debt levels and falling house prices were all called out as downside risks to household consumption.
Although the increasing acknowledgement of risks did not push the RBA to downgrade its GDP forecasts, economists noted the meeting took place on the eve of figures showing much lower-than-expected third-quarter growth.
‘Given the importance of household consumption for GDP, it doesn’t seem too much of a stretch to translate this risk bias to the headline growth forecasts,’ JPMorgan’s Sally Auld said.
‘Indeed, the 3Q GDP data – which were released the day after the December Board meeting – might go some way to crystallising these risks.’
Data from the Australian Bureau of Statistics showed the economy grew by just 0.3 per cent in the three months to September, well below the June quarter’s 0.9 per cent and short of the market consensus forecast of 0.6 per cent.
Annual growth slowed to 2.8 per cent, compared to an expected 3.3 per cent and the RBA’s full-year forecast of 3.5 per cent.
Royal Bank of Canada macro rates strategist Robert Thompson said the timing of the next hike to the cash rate was being pushed further and further back by markets, with increasing numbers of observers now expecting no move until late 2020.
The RBA said there was ‘no strong case’ for what it called a near-term increase.
‘The current stance of monetary policy would continue to support economic growth and allow for further gradual progress to be made in reducing the unemployment rate and returning inflation towards the midpoint of the target,’ the RBA said.
‘Members assessed that it would be appropriate to hold the cash rate steady and for the bank to be a source of stability and confidence while this progress unfolds.’
The RBA noted the downside risk to global inflation due to oil price falls and said the pace of the Chinese economy was ‘difficult to gauge’, although NAB economist Kaixin Owyong was less equivocal.
‘We note recent Chinese activity data has again been broadly softer-than-expected,’ she said.