‘Dovish’ RBA in ‘wait and see mode’

On Tuesday, the Reserve Bank of Australia (RBA) held the official cash rate at 1 per cent, following back-to-back cuts in June and July. 

However, following the announcement, RBA governor Philip Lowe reiterated that the central bank remains prepared to ease monetary policy further to stimulate the domestic labour market and help the RBA achieve its inflation target.

Mr Lowe also pointed to global economic uncertainty, lower-than-expected GDP growth and subdued wage growth.

“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,” Mr Lowe 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.”

According to AMP’s chief economist, Shane Oliver, Mr Lowe’s “dovish” statement suggests that the central bank maintains an easing bias, but he added that the RBA would hold off on any further adjustments until the impact of its cuts in June and July, as well as recent fiscal and regulatory policy stimulus, have been realised.

“For now, the RBA is in wait and see mode – basically waiting to see what sort of boost to growth the rate cuts of June and July and the federal government’s tax cuts for low and middle-income earners provide,” Mr Oliver said.

“Barring a shock to the economy, this is likely to remain the case for a few months.”

Mr Oliver said that the RBA would fail to meet its employment and inflation targets, prompting it to cut rates by a further 50 basis points by early next year.

“While the rate cuts seen so far and the federal government’s tax cuts will help, we see unemployment drifting up to around 5.5 per cent by year end in contrast to the RBA’s expectation for a fall to around 5 per cent over the next couple of years,” he said.

“The stimulus to date won’t be enough to get wages growth up and inflation back to target, and so we expect the RBA to resume cutting rate later this year with 0.25 percentage point cuts in each of November and February.”

[Related: RBA reveals cash rate decision]