RBA: Cash rate cut ‘appropriate’ if unemployment rises amid stagnant inflation

author-avatar By on April 16,2019
RBA: Cash rate cut ‘appropriate’ if unemployment rises amid stagnant inflation

Photo by Alvin Balemesa on Unsplash

Members of Australia’s Reserve Bank Board are strongly considering the prospect of cutting the cash rate should Australia’s economy experience rising unemployment in the absence of rising inflation.

Released today, the minutes of the Reserve Bank of Australia’s (RBA) April monetary policy meeting have revealed the board’s willingness to reduce the rate from the 1.50% it’s stood at since August 2016.

According to the minutes, members “discussed the scenario where inflation did not move any higher and unemployment trended up, noting that a decrease in the cash rate would likely be appropriate in these circumstances”.

The Board also agreed there was a low likelihood that the cash rate would need to be increased in the near term, given inflation is “likely to remain low for some time”.

For those heavily-indebted households struggling to meet the repayments of their mortgage, this may come as welcome news.

The RBA Board acknowledged that lower interest rates could have a smaller effect on the economy than in the past, given how indebted households already are and the current “adjustment” (i.e. price falls) in housing markets.

“Nevertheless, a lower level of interest rates could still be expected to support the economy through a depreciation of the exchange rate and by reducing required interest payments on borrowing, freeing up cash for other expenditure,” the minutes said.

The RBA’s “clearest signal yet”

Inflation in Australia has remained low for quite some time, currently sitting at an annual rate of 1.8%, and the unemployment rate has been trending lower since 2015 – now standing at an eight-year low of 4.9%.

While this may suggest there’s no need for the RBA to cut, many economists are forecasting slower economic growth to soon drive rising levels of unemployment.

This is largely why economists from major financial institutions such as Westpac and National Australia Bank have forecast not one, but two 25-basis point rate cuts from the RBA in 2019.

Westpac Chief Economist Bill Evans said Westpac is “encouraged” by the release of today’s RBA minutes and continues to believe the RBA will cut the cash rate in August and November this year.

“The minutes of the April monetary policy meeting of the Reserve Bank Board have provided the clearest signal yet that the Bank would be prepared to cut the cash rate,” Mr Evans said.

“While prospects for a policy response in May have disappeared, there is still ample time and data releases to justify our timing that there will be cash rate cuts in August and November.”

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Dominic Beattie is the Editor of Savings.com.au. He has been publishing articles on finance, business and economics since 2015, having previously worked as a Senior Journalist at financial research firm Canstar before helping to launch Savings.com.au in November 2018. Dominic aspires to help everyday Australians discover simple and effective ways to comfortably manage their finances and save money, without sacrificing their joie de vivre.

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