What the central bank thinks of the Australian economy

By Grace Ormsby

July 17 2019
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The Reserve Bank of Australia has outlined its decision-making process that led to the organisation’s decrease of the cash rate to a historical low.

The insight comes after the official cash rate dropped for two consecutive months to just 1.00 per cent at the beginning of July.

In the minutes of the monetary policy meeting of the Reserve Bank board, it was flagged that the global economy outlook remains “reasonable”, despite risks from international trade and technology disputes.

It was also flagged that despite tight labour markets and rising wages growth, inflation has remained low in advanced economies.

Members reportedly discussed the recent data on output and the labour market, noting GDP growth as well below trend over the year to the March quarter.

Despite strong growth in employment, it was noted by members that there has been little growth in household disposable income, which has contributed to low consumption growth.

It was also observed that employment growth continues to outpace growth in the working-age population. However, “most of the strength in labour demand over preceding months had been met by an increase in participation, which had risen to a record high level, rather than a decline in the unemployment rate”.

There appears to be optimism around a return of GDP growth in coming years, with members discussing accommodative monetary policy, strong public demand, a renewed expansion in the resources sector and exports growth.

Declining house prices was a key contributor to low growth in consumption, although there are signs of life in the property market as Sydney and Melbourne stabilise. Members noted that mortgage rates were at record lows and that there was strong competition for borrowers of higher credit quality.

In order to increase inflation, the members noted that it would require wage growth. It was noted that Australia could maintain a lower rate of unemployment, while achieving inflation consistent with the target. In light of this, the recent run of data and the lower level of interest rates resulting from the previous meeting, the case for a further reduction in the cash rate was considered.

Members noted that in the current environment, the main channels through which lower interest rates would support the economy were a lower value of the exchange rate than otherwise would be the case and lower required interest payments on borrowing, which would free up cash for other expenditure by households and businesses.

It was decided that a further reduction in interest rates would support the necessary growth in employment and incomes and promote stronger overall economic decisions, which would in turn support a gradual increase in the underlying inflation.

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About the author

Grace Ormsby

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

About the author

Grace Ormsby

Grace is a journalist on Momentum Media's nestegg. She enjoys being able to provide easy to digest information and practical tips for Australians with regard to their wealth, as well as having a platform on which to engage leading experts and commentators and leverage their insight.

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