The RBA keeps interest rates on hold — but admits the economy has slowed more than it expected

An actual photo of Australian economic growth
  • The RBA has kept rates on hold despite an escalation in the trade war overnight seeing the market price in an increased chance of an RBA rate cut.
  • The hold is in line with what economists were expecting — that the RBA will wait until later in the year to cut, followed by another possible cut in 2020.
  • Large in the RBA’s mind is the unemployment figure, which it hopes to reduce from 5.2% to 4.5%. While Australia remains some way from achieving that level, no recent deterioation in economic conditions has given the RBA some breathing room.

The Reserve Bank of Australia (RBA) has kept rates on hold at its August meeting but admits the Australian economy has slowed.

“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,” RBA governor Phillip Lowe said in a 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.”

Those uncertainities saw the RBA previously cut twice in two consecutive months — June and July It’s decision to hold in August maintains the official cash rate at 1%, its lowest level in Australian history.

While a cut this month had appeared unlikely, the recent escalation of the US-China trade war appeared to have worried some speculators. With a resolution to the trade spat looking even less likely after the US named China a currency manipulator, the market expectation of a rate cut rose slightly overnight, according to CommSec.

Tensions between the US and China were acknowledged by Lowe, who said that the ensuing trade war had hurt trade, which in turn presents a threat to Australia.

“The increased uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy remain tilted to the downside,” he said.

“The slowdown in global trade has contributed to slower growth in Asia. In China, the authorities have taken steps to support the economy, while continuing to address risks in the financial system.”

While Lowe chose not to cut, trade concerns will remain a major consideration for the RBA and could see the central bank cut in the coming months.

“Recently we’ve had a big ratcheting up of global economic growth concerns tied to the fact that we’ve seen a major escalation in the US-China trade war so that’s adding to some fears of an imminent economic slowdown and a need for central banks to cut rates in response,” IG analyst Kyle Rodda said in a video previewing the meeting.

“The RBA isn’t expected to be left out of this particular boat.”

However, if central banks like the RBA move in response, they’re expected to do so later in the year. That’s because domestic conditions, rather than global growth, are weighing on the RBA’s mind.

Chief amongst those concerns is the unemployment rate. Currently sitting at 5.2%, the central bank believes full employment will be achieved at 4.5%. If it can be maintained at that level, the RBA believes wage growth will pick up and spending will follow, providing much-needed stimulus.

That’s led economists to predict the June and July cuts won’t be the last ones Australia sees.

“Markets are still betting more or less that the RBA will cut again this year by around 25 basis points (0.25%). That’s expected to come around October with another interest rate cut expected in 2020,” Rodda said.

Lowe’s comments on Tuesday appear to support those predictions,

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 Board will continue to monitor developments in the labour market closely and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”