The RBA say subdued inflation may pave the way to an interest rate cut if it is needed to jump start the economy
The Reserve Bank appears upbeat on the home front but won’t rule out another interest rate cut in the face of an uncertain global economy.
The central bank’s first board meeting of the year left the cash rate at an all-time low of 2%, where it has stood since May 2015.
In the minutes of the February meeting, released this week, the RBA said subdued inflation may pave the way to lower the cash rate if it is needed to jump start the economy.
The board is also monitoring whether the recent improvement in labour-market conditions continues and if the recent turbulence on global financial markets leads to weaker overseas and domestic demand.
‘The board noted that the outlook for continued low inflation may provide scope for easier monetary policy, should that be appropriate to lend further support to demand,’ the minutes said.
Board members said the turmoil on overseas markets stemmed from uncertainty about the outlook for global economic growth.
‘Sentiment deteriorated early in the new year as concerns about China intensified and there were renewed declines in oil prices,’ the RBA said.
‘Global share prices fell by almost 10% over January… (amid) declines in sovereign-bond yields and depreciations of the currencies of a range of currency exporters.’
Much of the fears arose as markets began to lose faith in central banks around the world and their capacity to respond effectively to challenges they faced, the board said.
Since the RBA’s December meeting, the US Federal Reserve had hiked interest rates for the first time in nearly 10 years, amid further easing in the euro area and Japan.
On the other hand, low interest rates, lower petrol prices and increasing employment has encouraged Australian households to spend and invest in housing, the bank noted.
The recent run of economic figures like employment growth had been positive, and the falling Australian dollar was boosting demand for domestic production.
‘The forecast for the unemployment rate had been lowered, consistent with the recent unanticipated strength in the labour market,’ the RBA said.
The RBA also said there were reasonable prospects for growth to increase gradually over the coming two years.
And although commodity prices and mining investment had slumped further, the RBA predicted the drag on economic growth from this source to lessen a little over 2016 and 2017.
AAP
