Chief economist update: A prelude to an RBA cut?

The Reserve Bank of Australia (RBA) didn't disappoint when it kept the official cash rate unchanged at a record low 1.5% following its June 5 board meeting.

Except for a few tweaks in the wordings here and there, RBA Governor Philip Lowe's statement was more or less a copy and paste exercise of what was said after the May 1 meeting.

"The recent data on the Australian economy have been consistent with the bank's central forecast for GDP growth to pick up, to average a bit above 3% in 2018 and 2019...One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high."

"Employment has grown strongly over the past year, although growth has slowed over recent months...Wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time.

"Inflation is low and is likely to remain so for some time...The central forecast is for CPI inflation to be a bit above 2% in 2018.

"The housing markets in Sydney and Melbourne have slowed. Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas.

These, of course, led to the same conclusion:

"The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual."

It had been 23 long months now - the longest in recent history - that the official cash rate has remained stuck at 1.5%. It was last lowered from 1.75% in August 2016 and given current market expectations, several more months would be added to this record before the RBA moves on interest rates.

The general consensus is for a 25 basis point lift sometime in the second quarter of 2019. But why a lift, the RBA could still move in the other direction and lower interest rates.

Recall how last year's consensus for two rate hikes became one, then became none and pushed forward to 2018 and then pushed further back to 2019.

The history of the RBA's policy movements back this up. The second longest stretch of steady interest rates is the 18-month period between August 2013 and January 2015 with the cash rate frozen at 2.5% before being lowered to 2.25% on February 2015.

The RBA doesn't meet in January but the statement issued by then RBA Governor Glenn Stevens on December 2014 talked about moderate pace in the global economy, accommodative global financial conditions and "In Australia, most data are consistent with moderate growth in the economy...Inflation is running between two and 3%, as expected" ... and "some forward indicators of employment have been firming this year."

Therefore, "In the board's judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates."

And then came the cut at its February 2015 meeting, despite data available to the RBA at the time showed GDP growth averaged 2.6% in 2014, the weighted median inflation measure and wages growth both averaged 2.6%. The unemployment rate though was running at around 6%.

'Twas the same when the RBA held interest rates unchanged at 2% between May 2015 and April 2016 or at 4.75% back in November 2010 to October 2011, both were followed by a reduction in interest rates.

Just saying.

Ben Ong is the Director of Economics and Investments at Rainmaker Group. He previously worked as a fund manager, economist, asset allocation strategist, portfolio analyst and stock market analyst. Check out his economics analysis here.

Read more: EmploymentGDPHouseholdCPIIn AustraliaJune BoardMelbourneRBA Governor Glenn StevensRBA Governor Philip LoweReserve Bank of AustraliaSydney
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