At the June meeting, the Board resumed their easing cycle by lowering the cash rate for the first time since August 2016 in order to "support employment growth and provide greater confidence that inflation will be consistent with the medium-term target". That reasoning was then repeated in July when the Board delivered a follow-up rate cut to take the cash rate to a new record low of 1.0%.
Last week, Australia's Consumer Price Index data for Q2 showed that inflation on the Bank's preferred trimmed mean measure was steady at 1.6% over the year, meaning that it has now been below the 2-3% target for 3½ years (see our review here). That outcome was consistent what the Bank had forecast in May's quarterly statement. As the governor highlighted in his most recent speech ("Inflation Targeting and Economic Welfare") a key factor for this was that workforce participation had risen sharply over the past couple of years in line with strong employment growth, thus the labour market had operated with persistent spare capacity restraining wages growth and, in turn, inflation.
The Bank has concluded that for inflation to return to target, conditions in the labour market will need to tighten considerably to be consistent with an unemployment rate of around 4.5%. Since the previous meeting, June's Labour Force Survey showed that workforce participation touched a new record high of 66.0% and with employment rising by a softer-than-expected net 0.5k the unemployment rate remained at 5.2% (see our review here), which is a deterioration on the 5.0% outcome the Bank had forecast in May.
Given the importance of labour market conditions to the inflation target, it is not surprising that the governor in his speech on 25/7 made the comment that "the Board is prepared to provide additional support by easing monetary policy further". However, the governor preceded that statement by highlighting that the rate cuts from June and July "will support demand in the Australian economy" together with "recent tax cuts, higher commodity prices, some stabilisation in the housing market, ongoing investment in infrastructure and a lift in resource sector investment". But time will be needed to assess how the real economy is responding to its 50 basis points of cuts, and that was essentially the message the Board conveyed in the minutes from July's meeting where it noted it "would 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". (our emphasis).
Thus the Board is expected to remain on hold today, with all 24 economists surveyed by Bloomberg Australia in alignment on that view. The volatility of the past few days has seen markets bid up their expectation for another rate cut, though it is not fully discounted within pricing until November. In today's decision statement, the governor may offer some insight into the Bank's updated growth and inflation forecasts that will be included in Friday's Statement on Monetary Policy, which will be important in shaping expectations around the timing of any future easing.
