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Australia Monetary Policy July 2019

Australia: RBA cuts rates again in July to new record low to combat slowing economy

At its 2 July monetary policy meeting, the Reserve Bank of Australia (RBA) trimmed the cash rate for a second consecutive month to a fresh all-time low of 1.00% from 1.25%. The move matched expectations of a rate cut due to low inflation and subdued economic activity. Moreover, the RBA did not rule out a further rate cut in case the labor market underperforms and if growth remains weak.

Stable unemployment, subdued inflation, a slowing economy and heightened global trade tensions were behind the Bank’s decision to reduce the policy rate. Inflation slowed to 1.3% in Q1 from Q4’s 1.8%, landing further below the Bank’s 2.0%–3.0% target, while the unemployment rate remained stuck at 5.2% in May—above the 4.5% level the RBA considers to be conducive to faster inflation and wage growth. National accounts for Q1 also paints a weak picture of the economy, as modest wage growth, a domestic housing downturn and high levels of debt suppressed consumer spending. Additionally, trade and technology disputes continue to cast a shadow on investment decisions. That said, notwithstanding continued weakness in private consumption, house prices in Melbourne and Sydney seem to be stabilizing, and wages are picking up in the private sector. Against this backdrop, the Bank projects underlying inflation of 2.0% in 2020.

The Reserve Bank of Australia cited global trade and technology disputes, coupled with slower growth in China, as the main downside risks to the outlook. The communiqué suggests the RBA will leave the door open to some further monetary policy loosening in the near-term, which will ultimately depend on the evolution of the labor market and spare capacity utilization.

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