Australia goes for back-to-back rate cuts, keeps option for more

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AUSTRALIA executed its first back-to-back interest-rate cuts in seven years and left the door open for additional easing as policy makers attempt to support a slowing economy and try to rekindle dormant inflation.

Reserve Bank of Australia (RBA) Governor Philip Lowe lowered the key rate by a quarter-point to 1% on Tuesday as expected by money markets and most economists. He is due to address community leaders at an open-air dinner tonight in Darwin, where he is likely to flesh out his thinking on monetary policy and the agenda for the remainder of his visit to the north.

“The RBA hasn’t shut the door on more easing, but further rate cuts will be contingent upon a deviation in growth, labor market and inflation outcomes from the current set of forecasts,” said Sally Auld, a senior strategist for interest rates at JPMorgan Chase & Co. in Sydney who expects the cash rate to fall to 0.5% next year. “Still, this is a more dovish statement than we have usually seen after 50 basis points of easing from the RBA in recent years.”

Lowe’s second cut comes as global trade shows more signs of deteriorating, adding to headwinds constraining domestic demand as a slide in property prices discourages household spending. The Aussie dollar gained 0.2% to 69.77 US cents as of 4:08 p.m. Sydney time as futures traders boosted bets the RBA will cut at least once more, though they aren’t confident it will move again until November.

The resumption of trade talks between the US and China and signs that home prices are beginning to stabilize may provide Lowe room to pause as he waits for his monetary stimulus to flow through the economy. Yet the governor left his options open in the event further support is needed.

“The central scenario for the Australian economy remains reasonable, with growth around trend expected,” Lowe said in his post-meeting statement. “The board will continue to monitor developments in the labor market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”

At an international level, manufacturing took another knock at the end of the second quarter, signaling a worsening economic growth outlook that could force the world’s major central banks into action. Investors are pricing in a Federal Reserve rate cut this month and Goldman Sachs Group Inc. says the European Central Bank will lower its deposit rate by 20 basis points and restart asset purchases in September.

“The persistent downside risks to the global economy combined with subdued inflation have led to expectations of easing of monetary policy by the major central banks,” Lowe acknowledged today. He last month warned that the likelihood of major jurisdictions easing monetary policy could limit the stimulus generated as not everyone can have a weaker currency.

At home, an easing of lending rules combined with the well-flagged prospect of rate cuts may have begun to encourage buyers back into the housing market, with Sydney property prices rising for the first time in almost two years in June. Along with Prime Minister Scott Morrison’s center-right government’s surprise re-election in May — on a platform of tax cuts — the short-term prospects look brighter.

Structural problems remain: the central bank needs annual growth of more than 2.75% in order to soak up spare capacity and drive down unemployment. Lowe has been urging the re-elected government to intensify infrastructure investment and initiate a new round of economic reform to try to lift the economy’s growth potential.

He has argued that the path to lower rates was cleared somewhat by the RBA estimating the new level at which unemployment lifts inflation is about 4.5%, down from the previous 5%.

Lowe is betting that if the jobless rate grinds lower, workers will eventually be emboldened to ask for larger pay rises and price pressures will then flow through to inflation. Price growth has largely stayed below the bottom of the central bank’s target inflation range of 2-3% for the past few years.

The economy Down Under has slowed in recent quarters and is on track for its weakest fiscal year since 1991.

“Consumption growth has been subdued, weighed down by a protracted period of low income growth and declining housing prices,” Lowe said. “Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target.” — Bloomberg