- The rate cut was made on the basis of two considerations, domestic spare capacity and the trend lower in global interest rates.First, and foremost the decision to cut was made to support employment and income growth. Since the September Board meeting the Q2 National Accounts data showed further weak growth in household income. This is something we previously highlighted as a key issue for household consumption growth, which that RBA still describes as “the main domestic uncertainty…with the sustained period of only modest increases in household domestic income continuing to weigh on consumer spending”. With respect to supporting employment growth, the policy statement introduced the new less optimistic sentence of “forward-looking indicators of labour demand indicate that employment growth is likely to slow from its recent fast rate”. We expect yearly employment growth to slow from 2.5% to around 2¼% over the next six months. The second reason for the cut was the trend lowering in global policy interest rates. The RBA Board decided it could not ignore this influence citing “the effects this trend is having on the Australian economy and inflation outcomes”.
- The Board is prepared to further reduce interest rates.Repeated from the September policy statement was the phrase “the Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed”. Most of the remaining October statement was largely a repeat of the September statement. In our opinion, the RBA therefore remains mildly dovish with respect to the prospect of future easings. That the Governor didn’t release a more dovish statement probably reflects some ongoing reluctance to cut. Governor Lowe has previously warned that rate cuts risk being capitalised into asset prices rather than supporting trend growth. Nevertheless, with no support from fiscal policy and the RBA likely to face another bruising encounter at the next semi-annual parliamentary committee if it did not attempt to address the slowing economy and widening in labour market spare capacity, the Board had little choice but to remain open to further policy easing. But with the policy statement remaining only mildly dovish, we will keep our existing forecast for the next 25bp easing to occur in February 2020. If it had been more aggressive we would have brought it forward to Q4 this year.
- The policy statement did not reference any Board discussion on unconventional policy measures.For us, this suggests that the RBA believes it can lower rates further before it needs to potentially consider such measures. If needed, the focus is likely to be on unconventional measures that ensure an even lower risk-free rate. The RBA said in response to questions from the last parliamentary testimony that “this would involve taking the cash rate to a very low level and possibly purchasing government securities to lower the risk-free rate further out along the term spectrum”. We also support a BoE style targeted lending scheme to help pass-through further cash rate cuts through the banking system as the cash rate approaches the lower effective bound.
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|Citigroup Global Markets Australia Pty Limited||Josh Williamson|
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