RBA keeps the official interest rate on hold at 1%, but leaves door open to cuts

(Photo by Pillsbury Toaster Strudel via Getty Images)The RBA has plenty to consider before it makes another cut.

The Reserve Bank of Australia (RBA) has kept the official interest rate on hold at its historic low of 1.0%.

RBA governor Philip Lowe said on Tuesday that growth in the Australian economy is continuing to disappoint.

“Economic growth in Australia over the first half of this year has been lower than earlier expected, with household consumption weighed down by a protracted period of low income growth and declining housing prices and turnover,” he said in an official statement.

“The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income and a stabilisation of the housing market are expected to support spending.”

The decision was in line with consensus forecasts, with just four economists of 31 surveyed by Bloomberg tipping another cut.

READ MORE: Most Australian economists think interest rates will be kept on hold in September, but reckon the RBA’s time is running out

It comes after the RBA cut interest rates twice consecutively in June and July. Before that, the cash rate had sat at 1.5% for the better part of three years.

The official interest rate in Australia (Source: RBA)

The RBA has previously indicated that one of its key metrics remains unemployment. Lowe has previously revealed that the RBA’s goal is to reduce unemployment to 4.5% to finally produce wage growth.

Unemployment currently sits at 5.2%, and despite the economy generating a host of new jobs last month, that level is unlikely to budge according to RBA forecasts.

“Wages growth remains subdued and there is little upward pressure at present, with strong labour demand being met by more supply,” Lowe said.

If that remains the case, the RBA will have no choice but to cut, according to BIS Oxford Economics’ chief economist Sarah Hunter.

“The focus on the labour market remains, and with the unemployment rate still at 5.2% — despite continued solid jobs growth — we expect to see further easing this year and in early 2020 to support employment and wages growth,” Hunter said in a note on the RBA’s decision.

Reading from Lowe’s statement on Tuesday, it certainly remains open to the possibility.

“It is reasonable to expect that an extended period of low interest rates will be required in Australia to make progress in reducing unemployment and achieve more assured progress towards the inflation target,” he said.

The market has already priced in one cut either in October or November and another early next year as retail spending continues to weaken and economic growth remains well below trend.

The latest GDP figures out on Wednesday are expected to show the slowest growth in at least a decade. Investment bank UBS had forecast the slowest growth since the 1991 recession but better than expected export figures may prove to help boost those slightly.

Either way, all signs point to an Australian economy that is continuing to slow. That will help bolster expectations of a rate cut sooner rather than later.

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