Australia: Dovish RBA holds rates at all-time low in August
August 6, 2019
At its 6 August monetary policy meeting, the Reserve Bank of Australia (RBA) kept the cash rate unchanged at an all-time low of 1.00%. The decision came on the heels of two consecutive cuts in June and July and was in line with the expectations of most market analysts. Nevertheless, the RBA’s dovish tone signaled that further monetary policy easing is likely in the coming months.
The decision to hold rates reflected subdued, albeit slowly intensifying, inflationary pressures and lackluster economic activity. Inflation rose from 1.3% in Q1 to 1.6% in Q2, edging closer to the Bank’s 2.0%–3.0% target range, while the unemployment rate remained stuck at 5.2% in June—above the 4.5% level the RBA considers to be conducive to faster inflation and wage growth. Furthermore, in the accompanying statement, the Bank noted that growth in the first half of the year has been lower than had been expected, amid slumping housing prices and muted disposable income growth, ensuring the Bank’s tone remained largely dovish.
Looking forward, the RBA downgraded its inflation expectations against the backdrop of subdued price pressures and sluggish growth. The Bank now expects the headline rate to fall short of the target range in 2020 and will only climb above 2.0% in 2021. In its communiqué, the Bank highlighted uncertain domestic consumption dynamics, the feeble housing market and ongoing global trade disputes as the key risks to the outlook. As such, the Bank noted that “an extended period of low interest rates will be required in Australia” in order to reduce unemployment and bring inflation to within target range.
Author: Almanas Stanapedis, Economist