The Reserve Bank of Australia has held the cash rate at a record low 0.75 per cent, while keeping the door open for future cuts if the low cost of borrowing and tax cuts fail to stimulate the economy.
Having delivered a third 0.25 percentage point cut in five months at its October meeting, the RBA has now paused so it can judge the economic impact of already low borrowing costs and government tax handouts.
But while Tuesday’s decision was to hold the cash rate – a key component in banks’ interest rates for businesses and consumers – Governor Philip Lowe was clear there was still room for future cuts as central banks worldwide ease in response to low inflation.
“The board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time,” Dr Lowe said in his statement.
But while annual inflation inched higher over the third quarter, more gloomy economic data released on Monday suggested it is a question of when – not if – the RBA cuts again.
That impression was reinforced on Tuesday when – a day after September retail spending growth was shown to have fallen well short of expectations – the RBA trimmed its full-year economic growth forecast from 2.5 to 2.25 per cent in recognition of the fact that $22.4 billion in tax refunds have yet to stimulate consumer spending.
“The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending,” Dr Lowe said.
“Other sources of uncertainty include the effects of the drought and the evolution of the housing construction cycle.”
Capital Economics senior economist Marcel Thieliant said he still expects another 0.25 percentage point cut in February and another – to 0.25 per cent – in April.
But while Dr Lowe observed that US–China trade and technology disputes meant risks to the global economy were “tilted to the downside”, he reiterated the view expressed in a September speech that the local economy had reached a “gentle turning point”.
He noted that low interest rates, tax cuts, infrastructure spending, rising house price and a recovering resources sector should all support growth.
Tuesday’s decision, which was widely expected by economists, came hours after Treasurer Josh Frydenberg confirmed that there would be no change to the RBA’s longstanding 2.0-3.0 per cent inflation target, or the way it is held to account over how it tries to meet it.
There had been some uncertainty over whether the federal government would make the RBA more accountable for hitting its inflation target, but Mr Frydenberg confirmed the monetary policy conduct agreement between Canberra and the central bank will not be changed.
“I have concluded after careful consideration … that the existing statement is consistent with the government’s and the RBA’s shared understating of the monetary policy framework,” Mr Frydenberg said.
“Not changing the statement provides continuity and consistency at this time of global economic uncertainty.”
Mr Frydenberg added that “inflation is expected to return to the band” over the medium term”, echoing repeated comments by RBA Governor Philip Lowe, who had publicly argued against lowering the target to make it easier to hit in the current era of low price growth.
Annual inflation inched higher to 1.7 per cent in the September quarter, but has been below target for 15 consecutive quarters.
The Australian dollar rose slightly from 68.87 to 69.04 US cents about 45 minutes after the 1430 AEDT decision.