The decision statement from Governor Philip Lowe outlined that the basis of today's rate cut was "to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target". Also, as the governor foreshadowed during his speech in regional New South Wales last week, influences from offshore were also key to the decision to cut at this meeting.
Over the past few months, the Board has become notably more cautious in its commentary around global economic conditions and today's decision statement was reflective of this theme. In particular, the governor noted that the risks to the outlook for global growth "are tilted to the downside" and were linked to the tensions between the US and China, causing international trade volumes to weaken and firms to scale back their investment intentions amid the prevailing uncertainty. These factors were key to the decisions by US Federal Reserve and European Central Bank to ease their respective policy stances recently. Acknowledging these actions, the governor noted: "The Board also took account of the forces leading to the trend to lower interest rates globally and the effects this trend is having on the Australian economy and inflation outcomes". In last week's speech, the governor highlighted that if domestic policy was to be resistant to the global shift to lower rates: "our exchange rate would appreciate, which, in the current environment, would be unhelpful in terms of achieving both the inflation target and full employment".
From a domestic viewpoint, Q2's GDP growth outcome of 1.4% in annual terms was acknowledged as a "weaker-than-expected outcome", which potentially opens the door for a downgrade to its outlook in next month's quarterly statement. However, in keeping with the description he used last week, the governor again notes the economy may be at a "gentle turning point" given the support from lower interest rates, tax cuts, infrastructure spending, signs of stabilisation in the major housing markets and a more buoyant resources sector. Caution attends that outlook given prospects for household consumption growth are uncertain, with "the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending".
The key focus remains around the labour market and the outlook for wages growth. While strong employment growth was noted, the governor expects the pace to slow given the signals coming from forward-looking indicators, and also highlighted that the unemployment rate has "remained steady at around 5¼ per cent over recent months". Recall that the Bank estimates full employment to be consistent with an unemployment rate of around 4.5%. Keeping pace with robust employment growth has been participation in the workforce and as such: "Wages growth remains subdued and there is little upward pressure at present". With that being the case, the governor's outlook for inflation remained unchanged, with the headline and core measures anticipated to be "a little under 2 per cent over 2020 and a little above 2 per cent over 2021".
The concluding paragraph emphasises that further easing in the policy stance will be considered should it assess that it is warranted, either by events offshore or with respect to achieving its objectives: "The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time".
— — —
Following today's meeting, Governor Lowe delivered a speech at the RBA's Melbourne Board meeting dinner with the business community. In explaining the decsion from earlier this afternoon, he noted: "We are seeking to make more assured progress towards both full employment and the inflation target. We still expect to make progress on both fronts, but that progress is slower than we would like. Today's decision will help". The governor also reiterated his message around the global shift to lower interest rates and the implications for Australia, as well as subdued inflation pressures influenced by spare capacity in the labour market. A persistent theme of the governor's Q&A session following his speech last week was around the importance of providing businesses with the framework that will encourage expansion, investment, innovation and hiring. To assist with this, Governor Lowe suggested a renewed focus could be centred on structural reform to enhance productivity growth.
