While the assessment on the labour market remained reasonably constructive, the Governor noted that the unemployment rate had lifted from around 5.0% to 5.2% in April, with the implication that "there has been little further inroads into the spare capacity in the labour market of late". While wages growth has been lifting, the progress has been gradual and the overall pace "remains low".
On inflation, it is clear that the data from Q1 surprised significantly to the downside and was indicative that pricing pressures were broadly subdued. However, the Bank's forecasts for underlying inflation of 1.75% in 2019 and 2.0% in 2020 look to remain in place.
Governor Lowe reiterated these themes during a speech on Tuesday night. Though employment was strong it is not sufficiently running down excess capacity, while inflation was likely to remain subdued due to a combination of forces including; slow wages growth, intense competition in the retail sector, soft housing market conditions and the introduction of measures by governments to ameliorate cost of living concerns.
In this situation, the Board concludes that the most effective way to lift inflation back towards the 2-3% target and to prevent expectations from drifting lower is to strengthen the labour market -- it now assesses full employment to be reached at an unemployment rate of around 4.5% compared to its previous and long-held estimate of around 5%. Recall that the Bank has a mandate to target inflation between 2-3% and to maintain full employment. As noted in the decision statement, today's rate cut "will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target". However, Governor Lowe again on Tuesday night pointed out the limitations of monetary policy on its own and called for fiscal stimulus, in particular through infrastructure investment, and structural policies to rev up business activity and drive increased investment and expansion.
There are two main risks identified by the Governor that are present through its course of action; firstly, an uncertain outlook for household consumption due to ongoing low growth in incomes and the property market correction; and secondly, trade tensions that could negatively impact global growth.
For the future direction of policy, it can be anticipated that the Board will get at least one further 25 basis point cut away this year, as its growth and inflation forecasts in the May quarterly statement were predicated on market pricing that pointed to the cash rate falling to 1.0% by end 2019. On Tuesday night, Governor Lowe confirmed that the Board was not on a pre-set path, but that "it is not unreasonable to expect a lower cash rate". Developments in the labour market remain the top priority for the RBA.
