Daily Commentary BY THE CURVE TEAM –

Central Banks At The Ready As Outlook Wanes

19th of June, 2019

Central Banks ready to deliver more stimulus as risks to the outlook continue to build.

Yesterday’s minutes from the RBA’s June Board meeting outlined in detail the main driver behind the decision to cut the cash rate by 25bp to 1.25%. The minutes summarised the discussions on the spare capacity in the labour force by saying:

“members revised their assessment of labour market capacity, acknowledging the accumulation of evidence that there was now more capacity for the labour market to absorb additional labour demand before inflation concerns would emerge.”

The RBA rationalised he decision to cut the cash rate, saying that:

“A lower level of the cash rate would assist in reducing spare capacity in the labour market, providing more Australians with jobs and greater confidence that inflation will return to be comfortably within the medium-term target range in the period ahead.”

As far as the outlook for monetary policy, the RBA made it pretty clear that a further easing of monetary policy will ensue over the months ahead:

“Given the amount of spare capacity in the labour market and the economy more broadly, members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead.”

There are a number of factors that will determine how much further the cash rate will be cut and when. The main determinate over the near term outlook for the cash rate will be how the employment market evolves. Employment outcomes will drive the timing of when the next rate cut occurs. It seems that August is the most likely timing for a move. However July can’t be ruled out.

The long run outlook for monetary policy is more complicated. Employment outcomes will continue to be an important determinate for monetary policy. However it will also depend on how responsive other policy options are over the months ahead.

In the minutes, the RBA once again highlighted that “lower interest rates were not the only policy option available to assist in lowering the rate of unemployment.” Fiscal policy and major policy reform both have a role to play in supporting the economy and helping reduce the level of spare capacity in the employment market.

If there are substantial developments in these areas, then there could be less need for monetary policy to do the heavy lifting. If not then the RBA could be left with little choice than to go it alone.

The RBA isn’t the only major central bank looking to provide additional support to their economy. ECB President Mario Draghi was out on the front foot overnight as the outlook continue to soften. He said that “In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.”

He wasn’t specific in what he meant by additional stimulus but his sentiments suggest that it would continue to be a case of ‘whatever it takes’ as he added that:

“We will use all the flexibility within our mandate to fulfil our mandate — and we will do so again to answer any challenges to price stability in the future. Monetary policy remains committed to its objective and does not resign itself to too-low inflation.”

All eyes will now be on the BoE and US Federal Reserve to see what they have to say later in the week.  The Fed will prove most interesting after revelations overnight that Presidents Trump and Xi will have an extended meeting at the G20 later this month in an attempt to sort through the trade war mess.

David Flanagan

Director - Interest Rate Markets