Reserve Bank: Assessing the evidence
Reserve Bank Board meeting

The Reserve Bank has left the cash rate at a record low of 1.00 per cent. The Reserve Bank previously cut rates in both June and July, each time by 25 basis points or a quarter of a per cent.

What has changed since the last meeting?

The G7 Summit and Jackson Hole central bank symposium were overshadowed by US-China trade tensions.

The German and the UK economies contracted in the June quarter as business investment and exports fell.

The US Treasury yield curve inverted (2-year yields above 10-year yields) – in the past this has occurred before recessions.

The Australian jobless rate was steady at 5.2 per cent in July and the participation rate hit a record 66.1 per cent.

Skilled internet job vacancies increased by 0.4 per cent in July – the first increase in seven months.

The Wage Price Index rose by 0.6 per cent in the June quarter to be up 2.3 per cent on the year.

Capital city home prices rose by 1.0 per cent in August – the biggest rise since March 2017.

Private sector credit rose by just 0.2 per cent in July. Annual credit growth is 3.1 per cent – an 8-year low.

Retail trade fell by 0.1 per cent in July.

A record trade surplus of $8 billion occurred in June and the first current account surplus was recorded in 44 years in the June quarter.

The ASX200 index lost 3.1 per cent in August, breaking its longest monthly winning streak since September 2009.

The iron ore price fell by 27 per cent to US$85.85 a tonne in August.

The 10-year Australian Commonwealth Government bond yield hit a record low 0.85 per cent.

The Australian dollar has held around US66-69 cents.

The assessment

• Reserve Bank policymakers have maintained their policy easing bias today, leaving the door open for further rate cuts, “if needed”. But in a subtle change to the all-important final paragraph, the word “including” was added to “in the labour market” comment, re-emphasising the importance of continued job growth to the interest rate outlook. While the Board remained patient in August and September, we expect the cash rate to be cut again in November. In fact, there seems little reason to delay pulling the interest rate lever, in our view, given the Bank has recently modelled its downgraded economic growth, jobless and inflation forecasts on two rate cuts.

• That said, Governor Phillip Lowe appears sceptical about the effectiveness of taking interest rates towards the lower bound (near zero), arguing at the Jackson Hole symposium, “….given the challenges we face at the moment, it [monetary policy] is not the best lever.”

Perspectives on interest rates

• In July, the Reserve Bank Board cut the cash rate by 25 basis points (quarter of a per cent) to 1.00 per cent after a similar cut in June. There have now been 14 rate cuts since November 2011 with the cash rate cut from 4.75 per cent.

• The Reserve Bank had lifted rates seven times from October 2009 to November 2010 from 3.00 per cent to 4.75 per cent.

What are the implications of today’s decision?

• The property market is recovering and consumers are feeling more upbeat about their current finances thanks to tax cuts and lower borrowing costs. But tepid wages growth and elevated mortgage debt remain headwinds to the consumer.
Comparing the two most recent statements

• The statement from the August 2019 meeting is on the left; the statement from today’s September 2019 meeting is on the right. Emphasis has been added to highlight key points in the wording in the statements.

Published by Ryan Felsman, Senior Economist, CommSec