In today's statement, the Governor noted that "employment growth has continued to be strong" and also that "labour force participation is at a record level, the vacancy rate remains high and there are reports of skills shortages in some areas". Notwithstanding those remarks, there had "been little inroad into the spare capacity in the labour market recently, with the unemployment rate having risen slightly to 5.2%". In addition, while acknowledging a recent uptick, the pace of wages growth "remains low". The overall assessment, therefore, was that "these labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment".
Commentary on inflation was broadly unchanged, with pricing pressures subdued but anticipated to lift in the near term due to higher petrol prices. Core inflation is forecast to return to the 2% lower bound in 2020, though that will clearly be dependent on labour market developments and in particular the extent to which spare capacity can be reduced.
The Governor highlighted that the economic outlook remains reasonably constructive with output growth anticipated to return to trend, though the key risk domestically pertains to household consumption given it has been constrained "by a protracted period of low income growth and declining housing prices". Notably, developments in the global economy were also in focus by highlighting that "persistent downside risks" and "subdued inflation" had prompted markets to price in expectations for major central banks (US, Europe and Japan) to ease policy rates.
In the concluding paragraph, the Governor highlighted the importance of a lower cash in helping to bring about faster progress in reducing spare capacity and shoring up the inflation outlook. The possibility of further easing was left open with the line that "the Board will continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time".
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Following today's meeting, Governor Lowe provided further insights in a speech on Tuesday night (see here). The comments reiterated the message that the rate cuts from June and July were as a response to lowering spare capacity in the labour market, rather than a deterioration in the economic outlook.
In fact, the Governor highlighted that the Bank's domestic outlook was bolstered by very low interest rates, a rising terms of trade, an exchange rate that has depreciated over the past 2 years and an expected lift in household income growth. However, developments from abroad following the recent escalation in US-China trade tensions and subsequent expectations for easing from other major central banks have clearly been noted by the RBA, with the Governor noting that "this is quite a different world from the one we were facing earlier in the year".
There was a sense from the Governor's speech that with the Board having cut rates by a total of 50 basis points in June and July it will now wait for incoming data to assess the impact of those decisions. Once again, the Governor pressed the case for additional support from government through fiscal policy and structural reform. In concluding, given the uncertainties both domestically and from abroad, Governor Lowe highlighted that "the Board is prepared to adjust interest rates again if needed to get us closer to full employment and achieve the inflation target".
