Daily Commentary BY THE CURVE TEAM –

RBA Cuts, Open to More Action Ahead

3rd of July, 2019

The RBA cut the cash rate as was widely expected to a new low of 1% yesterday with the Governor flagging overnight that they may not be done yet.

Yesterday the RBA followed through with the second rate cut that was first flagged back in their May Quarterly Statement on Monetary Policy. A the time, they left their forecasts unchanged from the February statement. However the market pricing for the cash rate, which is an assumption which the forecasts are built on, had moved from no change to two rate cuts.

After reassessing the level of spare capacity in the labour force, the RBA elected to deliver back to back rate cuts for the first time in seven years. In his speech overnight, the Governor again reiterated that “this easing of monetary policy will support jobs growth across the country and provide greater confidence that inflation will be consistent with the medium-term target of 2 to 3 per cent.”

He also called out the Government once again, saying that monetary policy can’t do it alone. He pointed to fiscal support in the form of spending on infrastructure. Not just any project though, specifically projects that add to the country’s productive capacity. He also called for structural reform in the form of “policies that support firms expanding, investing, innovating and employing people.”

To hammer home his point, he said that “we will achieve better outcomes for society as a whole if the various arms of public policy are all pointing in the same direction.” 

It is the RBA’s hope that the current situation will galvanise both sides of government to put their differences aside and do what is in the best interests of the nation. In the event, the RBA is prepared to do more in necessary, with Lowe in his speech overnight saying:

“Given the circumstances, the Board is prepared to adjust interest rates again if needed to get us closer to full employment and achieve the inflation target in a way that supports the collective welfare of all Australians.”

With that said, any further policy action is unlikely to be imminent. Market pricing currently has another cut slated for February next year. Were that to be the case, it would give the RBA ample time to both assess in the data flow over the next few months but also see how the other policy options evolve at the same time.

David Flanagan

Director - Interest Rate Markets