The Reserve Bank struck a cautious note in keeping the official cash rate at a record low of 1.5 percent, leading economists to believe the chances of a rate cut are increasing.
The decision at April 2nd’s board meeting means the cash rate has not moved in 32 months, but a change in language on the falling house prices was among a number of subtle shifts toward a dovish tone.
The RBA’s 4.75 percent unemployment target was also absent from Governor Philip Lowe’s statement, which conceded that “further progress in reducing unemployment … is likely to be gradual.”
“The board will continue to monitor developments and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time,” the statement said.
CommSec chief economist Craig James said that final sentence suggested the RBA was inching towards an explicit easing bias.
“The Reserve Bank only changes the wording of the statement if it wants to send a signal,” he said.
“If the Reserve Bank became sufficiently worried about weak economic growth and too-low inflation, it has signalled that it will act to cut rates.”
Capital Economics senior Australia and New Zealand economist Marcel Thieliant concurred.
“The RBA sounded more cautious … and we think it won’t wait much longer before cutting interest rates,” he said.
“The bank’s assessment of domestic conditions was decidedly less upbeat than usual.”
Dr. Lowe said higher levels of public infrastructure spending, an upswing in private investment and a strong labour market had offset the impact of the drought on farm output and weak household consumption amid declining property prices.
Nonetheless, his commentary on declining house prices widened from “Sydney and Melbourne” in previous statements to “established housing markets”, which Capital Economics said reflected the fact that the malaise has spread to Brisbane and Adelaide.
Thieliant expects the RBA to start cutting as soon as August, eventually to 0.75 percent by mid-2020, while James said fiscal stimulus could negate the need for rate cuts.
Futures trading has priced in at least one 0.25 percent rate cut by the end of 2019, with many other economists tipping the RBA to cut twice to 1.0 percent in a bid to stimulate household consumption.
The rate, which reflects what the central bank charges commercial banks on overnight loans and influences all other interest rates, was last cut in August 2016 and hasn’t been hiked since November 2010.
The Australian dollar dipped below 71 US cents after the announcement, from 71.07 just before.
At 1520 AEDT, it was worth 70.88.
By Stuart Condie
