RBA ends 2019 on hold at 0.75%

The Reserve Bank of Australia Board left the cash rate on hold at 0.75% at its final policy meeting of 2019 in Sydney today. The decision statement from Governor Philip Lowe contained few substantive changes and maintained its easing bias by noting that the Board is prepared to cut the cash rate further "if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time".  

Central within the Board's deliberations in 2019 have been developments offshore, most notably in relation to US-China trade tensions and the associated negative impacts on trade flows and business investment. The governor's observation continues to be that the outlook for the global economy is "reasonable" but that the risks remain "tilted to the downside". In a more constructive tone, however, it was noted that "some of these risks have lessened recently". Following on from this, sentiment in markets has "continued to improve" and financial conditions remain supportive for businesses and households. 

Focusing domestically, the governor reasserted his recent assessment that the Australian economy has reached "a gentle turning point". Tomorrow's Q3 National Accounts are expected to show GDP growth lifted to around a 1.6% annual pace from 1.4% in Q2. From here, the Bank's outlook is constructive in assessing that growth will continue to rise to a 3% annual pace in 2021, supported by the stimulatory impact from previous interest rate cuts, tax relief, rising house prices, as well as ongoing infrastructure investment and by a resources sector which has turned the corner following a 6-year unwind from the peak of the investment cycle. The main risks continue to be seen as uncertainty around the outlook for household consumption growth, drought-related impacts, and the residential construction cycle.   

Following a soft batch of data since the Board's previous meeting, observations from the governor on the all-important labour market were unchanged in pointing out that "the Australian economy can sustain lower rates of unemployment and underemployment" and thereby justifies its easing bias. With spare capacity persisting in the labour market, inflation is only expected to be "close to 2 per cent in 2020 and 2021". 

The recent improvement in established housing market conditions continues to be led by Sydney and Melbourne, though the governor also acknowledged that price gains have now broadened into other markets as well. However, despite this backdrop, "new dwelling activity is still declining and growth in housing credit remains low".

Importantly, the governor outlined in this statement the transmission of its earlier rate cuts into the real economy is working through the channels of a lower exchange rate, rising asset prices, in turn leading to increased spending, and in boosting disposable incomes. Thus, concerns around negative impacts on confidence from low rates are not likely to be seen by the Board as an impediment to further reductions in the cash rate. For the time being, however, the approach taken by the Board is one of wait-and-see, with the governor noting that changes in monetary policy work with "long and variable lags". As such, following its three earlier rate cuts in 2019, the Board "continues to monitor developments" with the labour market and events from offshore remaining key to it acting on its easing bias in 2020.