RBA flags room for more rate cuts

Reserve Bank of Australia Governor Glenn Stevens has indicated that moderate inflation and below-average growth has given the central bank room to edge interest rates down to fresh record lows if necessary.

Though the RBA appears in no rush to ease monetary policy, leaving the cash rate at a record-low of 2.75 per cent for a second consecutive month at today’s Board meeting, remarks by Mr Stevens that “the inflation outlook…may provide some scope for further easing, should that be required”, is likely to stoke speculation that the central bank will lower interest rates further.

The RBA Board is comfortable that, despite the gradual rise in unemployment in the past 12 months and a recent decline in commodity prices, the current record-low cash rate of 2.75 per cent is sufficient to support activity.

Mr Stevens said recent economic data was consistent with the central bank’s assessment that the economy was currently growing at “a bit below” average pace, and would continue to do so “in the near term”.

But the recent plunge in the dollar, which has lost 7 per cent of its value against the US currency in the past month, has helped reduce the pressure for another rate cut, at least for the moment.

Mr Stevens hinted that the central bank is looking for the currency to lose even more ground, reiterating the RBA’s judgement that it is high considering the slide in export prices that has occurred in the past 18 months.

In coming to its decision, the Board has made judgements about how economic conditions both at home and abroad are likely to unfold in the next year or so.

Internationally, it expects global growth to accelerate next year, supported by “very accommodative” monetary policy offshore (which in turn has fuelled the provision of cheap credit). Similarly, it expects low interest rates here to continue to support and strengthen activity in Australia. Mr Stevens said there were tentative signs of this effect in a lift in household borrowing.

The upshot is that the RBA sees no need to hurry in either tightening or easing monetary policy for the time being, it’s assessment being that “the easier financial conditions now in place will contribute to a strengthening of growth over time”.

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