Daily Commentary BY THE CURVE TEAM –

RBA Prepared to Act If Needed

17th of April, 2019

The minutes to the RBA’s April Board meeting revealed that the RBA’s ‘balanced outlook’ is becoming more one sided.

Yesterday’s minutes from the RBA’s April Board meeting contained a number of clues to the outlook for monetary policy over the months ahead. What was pretty clear from the minutes was that the upside risks continue to dissipate as the downside risks to the outlook dominate discussions by the RBA’s Board.

Based on current circumstances , the minutes stated that “members agreed that the likelihood of a scenario where the cash rate would need to be increased in the near term was low”.

Subsequently, “members also discussed the scenario where inflation did not move any higher and unemployment trended up, noting that a decrease in the cash rate would likely be appropriate in these circumstances.”

Interestingly the RBA admitted that the impact of any further adjustments down in the cash rate would be less effective that in the past. The minutes noted that members “recognised that the effect on the economy of lower interest rates could be expected to be smaller than in the past, given the high level of household debt and the adjustment that was occurring in housing markets”.

At the moment though the RBA still doesn’t see the immediate case for any change in the current setting of monetary policy with the minutes stating that:

“The central scenario was for further gradual progress to be made on both unemployment and inflation. Members observed that a pick-up in growth in household disposable income was an important element of these forecasts. Given this outlook for further progress towards the Bank’s goals, members agreed that there was not a strong case for a near-term adjustment in monetary policy.”

They went on to add that “members recognised that it was not possible to fine-tune outcomes and that holding monetary policy steady would enable the Bank to be a source of stability and confidence.”

So the RBA still doesn’t see the case for providing further support to the economy at present and the hurdle rate to lowering the cash rate remains high. The key sentence from the minutes though was that the despite the high hurdle rate and the limited impact of a rate cuts from the already record low, the RBA said that:

“a lower level of interest rates could still be expected to support the economy through a depreciation of the exchange rate and by reducing required interest payments on borrowing, freeing up cash for other expenditure.”

So the RBA is ready to act if the data suggest “to support sustainable growth in the economy and achieve the inflation target over time” if the inflation and employment data don’t evolved as expected over the months ahead.

David Flanagan

Director - Interest Rate Markets