Last week, the Reserve Bank of Australia (RBA) released minutes from its monetary policy board meeting in June, in which it decided to cut the official cash rate for the first time in almost three years, decreasing it to a new record low of 1.25 per cent.
In its minutes, the board noted that further cuts to the cash rate are “more likely than not” amid below-target GDP growth and weaker than expected labour market conditions.
The RBA’s rhetoric prompted head of Australian economics at ANZ David Plank to question what he described as an “unusual” signal to the market.
“Such an explicit signal about the likelihood of another cut in the minutes of the meeting where rates were moved is unusual,” Mr Plank said.
“The minutes from the meetings in February 2015 and May 2016, in each case being the meeting where the first of two cuts took place, did not provide any such clarity about the next move.
“We clearly need to take note of this unusually strong signal.”
The economist added that, based on the rhetoric, the RBA’s minutes suggest the central bank is considering pursuing an aggressive agenda to stimulate the labour market but said he would look for clarification from the central bank before altering ANZ’s monetary policy forecast from a second cut in August to a cut in July.
That echoed the views of another economist at fellow major bank NAB, who recently suggested that the Reserve Bank is looking at the possibility of more “radical” measures to shore up the economy alongside additional rate cuts.
RBA governor Philip Lowe has since elaborated on the central bank’s monetary policy stance, flagging the possibility of further adjustments, with recent data suggesting that the economy isn’t “making any inroads into the economy's spare capacity”.
“Given this, the possibility of lower interest rates remains on the table,” Mr Lowe said. “It is not unrealistic to expect a further reduction in the cash rate as the board seeks to wind back spare capacity in the economy and deliver inflation outcomes in line with the medium-term target.”
Upon reflection on the governor’s comments, Mr Plank touted the likelihood of two consecutive cuts to the official cash rate off the back of the adjustment in June, against market expectations of a cut in August and another later this year.
“The critical takeaway from a monetary policy perspective is that the cash rate is heading lower. We already knew this, of course, and the speech does not add much to our understanding of the speed or extent of the coming rate cuts,” he said.
“But clearly there is a very real chance the cash rate is cut in both July and August given the RBA’s assessment that “we are not making any inroads into the economy’s spare capacity.”
The RBA’s June cash rate announcement prompted an immediate response from the market, with several lenders, including some though not all of the big four banks, passing on the full reduction to their mortgage customers.
The reduction also sparked a wave of cuts to savings rates and has resulted in a reduction in the value of the Australian dollar.
Some observers have interpreted the RBA’s decision as a sign that the economy could be at risk of falling into recession amid internal and external headwinds.
The RBA board will meet again next Tuesday (2 July).