As expected, the Reserve Bank kept its official cash rate on hold at a record low 1.75% at its June board meeting yesterday, but there was a hint that a further cut could happen if inflation looks like remaining lower than it should be.
Most economists had expected the central bank would not follow up its May rate cut with a second for 2016, and it met that expectation.
The decision to keep rates steady follows a series of strong economic data, including the March quarter GDP report showing a 1.1% rise quarter on quarter in the three months to March and a 3.1% annual rate, the strongest for four years.
That was on top of moderate retail sales data for April, strong business credit, a rise in house prices and building approvals, and a rebound in job ads in May.
The Australian dollar strengthened to 74.20 US cents following the announcement as the post meeting statement from Governor Glenn Stevens left the door open to a further cut in rates, if needed.
"Inflation has been quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time,” Governor Stevens said.
That paragraph is much shorter and more direct compared to the reference to inflation in the post May board meeting statement which announced the cut in the cash rate to 1.75% from 2%. It said:
"Inflation has been quite low for some time and recent data were unexpectedly low. While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.”
Now there’s the acceptance that cost pressures will remain low for longer. Previous statements from Mr Stevens referred to a period for “the next year or two”. Now the RBA Governor is not putting any sort of limit on the period for lower than trend inflation (and remember the RBA’s inflation target is 2% to 3% “over time").
Mr Stevens’ statement yesterday ended with the paragraph: “Taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.”
In other words the bank sees inflation remaining lower for up to three years, perhaps a bit more – or well into 2018.
And the rest of the economy is doing OK.
"In Australia, recent data suggest overall growth is continuing, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators have been more mixed of late, but are consistent with continued expansion of employment in the near term,” Mr Stevens said yesterday.
"Low interest rates have been supporting domestic demand and the lower exchange rate overall is helping the traded sector. Over the past year, growth in credit to businesses has picked up, even as that to households has moderated a little. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.
"Indications are that the effects of supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. Dwelling prices have begun to rise again recently. But considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities,” Mr Stevens said.
The AMP’s Chief Economist, Dr Shane Oliver didn’t see any easing bias in yesterday’s statement.
“Despite the absence of any clear easing bias, we remain of the view that the RBA will cut rates again later this year. The risks to inflation are on the downside to the RBA’s already below target inflation forecasts thanks to underlying deflationary pressures globally and record low wages growth domestically,” Dr Oliver wrote yesterday.
"What’s more continuing delays to Fed tightening threaten to keep the Australian dollar elevated which would be bad for both growth and the desire to boost inflation. In fact the $A looks to be on the way back up again reflecting Fed delays and the RBA’s lack of a clear easing bias.
“As such we are allowing for two more 0.25% rate cuts this year, the first in August just after June quarter inflation data is released and when it next reviews its economic forecasts,” Dr Oliver said.
