(Bloomberg) -- Australia’s central bank is likely to lower interest rates again to drive increased hiring and boost households’ confidence that inflation will return to target.
The Reserve Bank made the comment in minutes of its June 4 policy meeting, released in Sydney Tuesday, when it eased the cash rate to 1.25%, the first reduction in almost three years.
“Given the amount of spare capacity in the labor market and the economy more broadly, members agreed that it was more likely than not that a further easing in monetary policy would be appropriate in the period ahead,” policy makers said.
“They also recognized, however, that lower interest rates were not the only policy option available to assist in lowering the rate of unemployment.” This line likely referred to RBA chief Philip Lowe’s (NYSE:LOW) speech following the cut, when he said infrastructure investment and structural reforms could help speed economic growth without the downsides of monetary policy.
The Australian dollar fell after the report, buying 68.41 U.S. cents at 11:39 a.m. in Sydney, compared with 68.57 cents before its release.
The minutes suggest the central bank is again homing in on inflation, acknowledging it has remained below target for three years and could start to impact household expectations. When he took the helm in 2016, Lowe said RBA officials aren’t “inflation nutters” and were focused on boosting financial system resilience through better lending standards and deflating asset prices.
“The inflation target plays an important role as a strong medium-term anchor for inflation expectations, to help deliver low and stable inflation, which in turn supports sustainable growth in employment and incomes,” the board said.
The central bank again spelled out that the bank’s growth, inflation and employment outlook were based on market pricing that rates would be lower in the period ahead.
Debt Dilemma
The board was also confident that the easing wouldn’t undo the past three years’ work: “members judged that a decline in interest rates was unlikely to encourage a material pick-up in borrowing by households that would add to medium-term risks in the economy.” Australia’s household debt currently stands at a record high.
Policy makers reiterated that they expected lower rates to stimulate the economy through the exchange rate, cheaper business borrowing costs and reduced mortgage payments for households, freeing up cash for other spending.
Household spending has slowed sharply as house prices tumbled in Sydney and Melbourne, and given this accounts for almost 60% of GDP, is a key sector.
On the international stage, the bank warned of “the intensifying downside risk” posed to the global outlook from the escalation of the U.S.-China trade dispute.
At home, the central bank said data received for the June quarter and indicators of future activity “had been mixed.” It also said employment growth was likely to moderate a little, based on liaison with firms and other forward indicators.
The RBA is now targeting unemployment of 4.5% to try to rekindle inflation, down from the 5% it had previously estimated as full employment.
