RBA to further ease monetary policy on weak inflation outlook, likely to cut cash rate to 1.5pct in August

The Reserve Bank of Australia’s meeting minutes focused on the central bank’s lowering of inflation outlook. The minutes emphasise the central bank’s scepticism regarding the outlook of inflation and its worries about the impact of lower inflation on wages growth. The minutes emphasized on the possibility for weakness in inflation to be cemented. It noted that “if inflation was to be persistently lower than previously forecast, it was possible that, in time, this could be reflected in lower wage growth”.

Even though the minutes suggested that there is a chance for labor costs to rebound earlier than anticipated, they also focused on the possibility that increase job security will be a “factor in the global weakness in wage growth”.

The RBA’s comments on economic growth were in line with the SoMP. The central bank stated that there are no alterations to the projections for unemployment or activity. Also, it mentioned that China’s outlook remained a major issue.

On housing, the central bank’s minutes stated that “supervisory measures were strengthening lending standards and that the potential risks of lowering interest rates therefore were less than they had been a year earlier”. The RBA will be keeping a close watch on housing market developments. Meanwhile the auction clearance rates have remained the same at the national level since the reduction in rate; however, housing prices have been increasing strongly through April and May. Furthermore, APRA and the RBA are expected to keep a close watch given that the recent Financial Stability Review noted increased competition for investor lending.

The degree of the lowering of inflation outlook in the SoMP implies that the central bank is expected to further ease policy, noted ANZ in a research report. Given that, the talks regarding the probability of waiting for additional data implies an absence of urgency and “counts against the possibility of a back-to-back cut in June”, added ANZ.

“We continue to expect further monetary policy easing given the soft inflation outlook, and look for another 25bp cut in the cash rate to 1.5% at the August meeting”, said ANZ.