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RBA working a plan for growth

August 2, 2019

The Reserve Bank of Australia took a breather in August and left the cash rate unchanged at 1 per cent.

While the RBA remains upbeat, they are adopting a wait-and-see approach to a broad range of monetary and fiscal measures designed to get jobs moving. They’ve also indicated they’re willing to pull the cash rate lever down in response to domestic and global concerns.

Rate’s steady, but…

When the RBA cut rates in June and July, they had hoped a lower cash rate would provide a key piece of the puzzle for a decent economic rebound: lower rates, tax cuts, strong infrastructure spending and a housing market that appeared to have settled on a bottom. These positive factors were weighed against continuing retail weakness, slowing jobs growth and high household debt.

In August, the rate was left unchanged at 1 per cent. The RBA minutes indicated the cash rate is likely to stay low for an extended period of time and if unemployment doesn’t pick up it would be willing to move down again.

It was all eyes on the global backdrop to see to further direction – and the Reserve didn’t have to wait long before the global ructions had the financial markets pricing in another 50 basis points cut.

On the global front

The big international story is the increasing tensions in the US–China trade war. Tit-for-tat tariffs, talk of company blacklistings, squabbles over 5G and other technological tensions have been ongoing, and the Chinese depreciation of the yuan led to a major sell-off in global markets. Last week’s events put a lower Australian cash rate firmly on the table and the Aussie dollar fell to a decade low against the US dollar.

Couple that with a slowing Chinese economy, high government debts and record low interest rates making monetary policy more ineffective than in previous decades, there is a case for watching closely.

The Australian economy outlook

The Reserve blamed the lower-than-expected growth in the first half of 2019 on flat consumption led by low income growth and declining house prices. It is more hopeful for growth picking up to 2.5 per cent over the rest of 2019, supported by low rates, tax cuts and a better outlook for the resources sector. That’s if the global front settles.

Employment

The unemployment rate continues to sit at 5.2 per cent and wages growth remains stubbornly low. The Reserve is keeping an eye on the leading indicators, which could put pressure on jobs prospects in the following months – such as the slowing down of the pipeline in residential construction. The Reserve doesn’t forecast wages growth in the near term.

Where to from here?

The Reserve continues to see through its plan to stimulate economic growth through monetary policy. But weak data, sudden movements in the US–China trade relationship and investor sentiment mean the RBA is poised to lower interest rates further in the coming months.

But once again, the government will have to chip in with some fiscal support should sentiment turn. Remember though, the RBA thinks we are in better shape than the headlines currently suggest.

The Reserve continues to see through its plan to stimulate economic growth through monetary policy.