RBA not ruling out a cash rate below 2%

by Julia Corderoy20 May 2015
The Reserve Bank hasn’t ruled out the possibility of future rate cuts, which will bring the cash rate to a historic low of below 2%.

In the minutes of the monetary policy meeting for May, when the Reserve Bank decided to reduce the cash rate by 25 basis points to 2%, the board denied to provide clear guidance on the future path of monetary policy, but did hint that a further cash rate cut was not out of the question. 

“Members agreed that, as at the time of the reduction in the cash rate in February, the statement communicating the decision would not contain any guidance on the future path of monetary policy,” the minutes stated.  

“Members did not see this as limiting the Board's scope for any action that might be appropriate at future meetings.”

The Reserve Bank noted that growth in both the mining and non-mining sectors were now expected to take longer to strengthen, the unemployment rate was likely to remain elevated for longer and wage growth was expected to be slightly lower than in earlier forecasts.

This sentiment echoes what Philip Lowe, deputy governor of the Reserve Bank said in a speech at the Corporate Finance Forum earlier this week, when he maintained that the central bank is seeking to play a “constructive role” in boosting the economy. 

“In this challenging global environment, the RBA is seeking to play a constructive role. As I said earlier, low interest rates are supporting spending in the economy. The further reduction in the cash rate earlier this month will provide a bit more support and it will help reinforce some of the recent encouraging signs, particularly in household spending,” he said.

But whilst further rate cuts are not out of the realm of possibility in the coming months, Lowe said it is unlikely to be in their long-term interests.

“It is, however, unlikely to be in Australia's long-term interests to engineer a consumption boom by encouraging people to borrow large amounts against future income. This is especially so when debt levels are already high and prospects for future income growth are not as positive as they once were,” he said.

“So, there is a fairly fine line to tread here. The RBA's recent decisions have sought to strike a prudent balance – to help encourage consumption growth and thus business investment, but avoid the type of imbalances that could cause problems later on. We will continue to assess that balance carefully.”

In response to potential risks that low interest rates could cause in the housing market – a major reason against cutting rates – the board noted that the growth in housing credit had remained in a relatively safe zone.

“While concerned about the very strong pace of growth of housing prices in Sydney, and observing that conditions in Melbourne were strong, members saw much more muted trends in other capital cities,” the minutes stated. 

“…On the data available for this meeting, however, it did not appear that the growth of housing credit, either for investment or owner-occupancy purposes, had been increasing over recent months.”
 

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