Australian Financial Review
The Reserve Bank has played down fears of rising household debt levels following its decision to cut interest rates a second time to a record low 1 per cent, and the central bank’s latest minutes suggest that “unwelcome borrowing” is unlikely.
Minutes from the Reserve Bank meeting released on Tuesday indicate that while boosting employment and wage growth was a clear focus for the central bank in cutting rates again, it did consider concerns about households taking on more debt and potentially inflating property prices.
“Members also judged that the extent of spare capacity in the economy, and the likely pace at which it would be absorbed, meant that a decline in interest rates was unlikely to encourage an unwelcome material pick-up in borrowing by households that would add to medium-term risks in the economy,” the minutes said.
“Members judged that a further reduction in the level of interest rates would support the necessary growth in employment and incomes.”
The market is pricing in a 78 per cent chance of another 0.25 percentage point cut in November.
ANZ chief economist David Plank said he believed the RBA board was not expecting house prices to surge back.
“[The minutes] suggest the board did not see rapid house price increases as an impediment to further easing. Neither do we. Of course, if house prices respond aggressively, it will create a policy dilemma for the RBA.”
Room for another cut
The central bank has clearly left the door open for further easing, but the timing is less explicit.
“The Board would continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time,” it said.
Westpac’s Bill Evans said the chance of another rate cut happening soon had diminished given the removal of some key sentences. “In the June minutes, the key ‘considerations’ section noted ‘members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead’. This very strong sentence was not repeated in the July minutes,” he said.
The central bank also pointed to several areas that would take the economy back to trend growth levels.
“Accommodative monetary policy, strong public demand, a renewed expansion in the resources sector and growth in exports were also expected to support a return of GDP growth to trend over coming years,” the RBA said.
It pointed to infrastructure yet again as an important part of getting the economy back to trend growth.
‘Strong pipeline of projects’
“Members noted that there was a strong pipeline of public infrastructure projects that could support activity for some time.”
A shift in the likelihood of US interest rate cuts also had some bearing on the central bank’s decision to cut again in July. “Members commenced their discussion of financial markets by noting the significant change in the expected path of monetary policy around the world, particularly in the United States,” the minutes said.
The minutes of last month’s Federal Reserve meeting showed that many officials forecast a “strong rate-cut case amid rising risks”.
The Reserve Bank said its decision to cut rates was also in part to weaken the exchange rate.
“The main channels through which lower interest rates would support the economy were a lower value of the exchange rate than otherwise would be the case and lower required interest payments on borrowing, which would free up cash for other expenditure by households and businesses.”
Article appeared in The Australian Financial Review on 16 July 2019.
Article written by Matthew Cranston.