RBA Says Rate Cut Appropriate If No Further Jobs Improvement

RBA Says Rate Cut Appropriate If No Further Jobs Improvement

(Bloomberg) -- The Reserve Bank of Australia said an interest-rate cut would likely be appropriate if there was no further improvement in the jobs market, when it discussed two potential easing scenarios at its May 7 board meeting.

  • Given international evidence and recent weak Australian inflation data, the board agreed that a further drop in unemployment would be consistent with achieving the inflation target, and therefore agreed that a rate cut would “likely be appropriate” if there was no further improvement in the labor market in the period ahead
  • In the event of unemployment trending higher and inflation staying weak, it also acknowledged that a cut would likely be appropriate, according to minutes of the board meeting

Key Insights:

  • The RBA noted that its recent revised forecasts for growth and inflation were based on lower rates over the next six months, as per usual assumptions in line with market pricing. This implied that “without an easing in monetary policy over the next six months, growth and inflation outcomes would be expected to be less favorable than the central scenario.”
  • The central bank also acknowledged that “spare capacity would remain in the economy for some time”, with the jobless rate expected to remain around 5% over 2019 and 2020. The board meeting was held the week before the release of the April jobs report, which showed unemployment creeping back up to 5.2%.
  • The board also noted that “leading indicators of labor demand had eased over recent months and provided a mixed picture of the near-term outlook.”
  • The RBA recognized that there were risks to its forecasts “in both directions.” The risks to the global economy and domestic household consumption remained tilted to the downside, while upside risks included continued accommodative financial conditions and increased terms of trade.
  • Members noted that the sustained low level of interest rates over recent years had supported economic activity and helped lower unemployment; however, household income growth remained low and the March quarter inflation data indicated that domestic price pressures were lower than thought.

Market Reaction:

The Australian dollar fell, buying 69.16 U.S. cents at 11:59 a.m. in Sydney, compared with 69.23 cents before the report

Get More:

  • Rate-cut bets were pared on Monday following the weekend’s surprise election result
  • The chance of a June easing had risen last week after the unemployment rate unexpectedly climbed in April
  • NAB’s gauge of employment had even worse news for RBA watchers

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