The Reserve Bank of Australia looks increasingly likely to cut the cash rate as early as next month after board members said “a decrease … would likely be appropriate” if the labour market did not improve.
The RBA this month held the cash rate at its record low 1.5 per cent but minutes of the May meeting released on Tuesday show board members explicitly acknowledged the likelihood of a cut if unemployment did not fall.
But a week after the RBA board meeting, official data showed the unemployment rate rose in April to a worse-than-expected 5.2 per cent.
“Members discussed the scenario where inflation did not move any higher and unemployment trended up, recognising that in those circumstances a decrease in the cash rate would likely be appropriate,” according to the minutes.
NAB markets economist Kaixin Owyong noted the minutes had also dropped the reference to “not a strong case” for a near-term move in the cash rate.
“We read this discussion as the board requiring the unemployment rate to fall to stay on hold, but the latest data shows the unemployment rate has trended up,” Ms Owyong said.
“Accordingly, we still forecast a 25bp rate cut in June.”
The RBA said, for a second month in a row, board members noted any stimulating effect on the economy of a cut would likely be less than in the past given households have historically high levels of debt and against the backdrop of a faltering housing market.
“Nevertheless, a lower level of interest rates could still be expected to 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 minutes said.
Royal Bank of Canada macro rates strategist Robert Thompson pointed out that Tuesday’s proposal by APRA to remove the hard 7.0 per cent floor rate mortgage lenders use in assessing serviceability – in favour of a 2.5 per cent buffer – could strengthen the case for a lower cash rate.
“These measures would enhance the effectiveness of rate cuts by allowing serviceability assessments to track RBA rate cuts more closely,” Mr Thompson said.
Growing numbers of economists have been predicting two 0.25 percentage point rate cuts by the end of 2019.
The Australian dollar ticked as much as 0.2 per cent lower against its US counterpart on the release of the minutes and, at 1248 AEST, was worth 69.12 US cents.