Reserve Bank of Australia board members agreed back-to-back cash rate cuts were necessary to eat into spare labour market capacity, but a high participation rate and an expanding working age population means it will take “some time” to achieve the ideal jobless rate.
Minutes from the RBA’s July 2 meeting show members agreed a consecutive 25 basis point cut to a record low 1.0 per cent would help deliver a lower exchange rate and reduce interest payments on borrowing, freeing up more cash for households and businesses and stimulating the economy.
But economists noted the central bank had inserted some conditionality into its outlook, noting that “the board will continue to monitor developments in the labour market closely and adjust monetary policy if needed”.
Notably, while members agreed the global outlook remained “reasonable”, they refrained from using that term to describe the local economy following another month of mixed economic data.
Underwhelming retail figures and continued wage stagnation weighed against improved business and consumer sentiment over the preceding month, while the May unemployment rate remained stubborn at 5.2 per cent.
The minutes released on Tuesday also showed most of the strength in labour demand over preceding months had been met by an increase in participation, which had risen to a record high level, rather than a decline in the unemployment rate.
“Although there had been a modest pick-up in wages growth in the private sector, wages growth had remained low overall. In combination, these factors suggested that spare capacity was likely to remain in the labour market for some time,” the minutes read.
RBA members said they would continue to monitor the jobs market as it mulls the timing of any further cuts, having already flagged another move before Christmas.
RBC Capital Markets Australia economist Su-Lin Ong said the minutes reaffirmed the RBA’s easing bias, but also appeared hopeful that both rate cuts and fiscal stimulus would lend support and help deliver stronger growth and incomes to eventually lift inflation.
“Growth and employment will need to be much stronger for a sustained period to absorb this slack and eventually lift inflation,” Ms Ong said.
“And, the risk is that further monetary and fiscal stimulus will be needed to achieve this.”
The minutes show RBA members were no longer worried low rates will prompt “an unwelcome material pick-up in borrowing by households that would add to medium-term risks in the economy”, but it did note the impact a cut would have on savings rates.
“Many older Australians rely on interest income, which would decline with lower interest rates,” the minutes read.
“(But) the overall net effect of lower interest rates was nevertheless expected to boost aggregate household disposable income and thus spending capacity.”
Members also noted that the federal government’s low- and middle-income tax offset would boost household disposable income and could support household consumption in the second half of 2019.
A “significant change” in the expected path of monetary policy around the world, was also touched upon, particularly an expected easing in the United States.
“Both the trade-related downside risks to global growth and ongoing subdued inflation had spurred an increased expectation that major central banks would ease monetary policy,” the RBA’s minutes read.
“This had reinforced already very accommodative conditions in global financial markets.”