Published: Fri, May 24, 2019
Markets | By Otis Pena

RBA Governor Signals a Cash Rate Cut

RBA Governor Signals a Cash Rate Cut

Australia's crumbling housing market, where prices are down nearly 10% from their 2017 highs, is also dragging on the economy. "Given this assessment, at our meeting in two weeks' time, we will consider the case for lower interest rates", he said.

Dr. Lowe said without a cut in interest rates it was unlikely the bank's forecasts for lower unemployment and a lift in inflation would be met.

As global demand has cooled over the past year, and a protracted Sino-U.S. trade war took a toll on businesses worldwide, central banks around the world have kept policy stimulatory. Rates have been on hold since mid-2016 but disappointing data on economic growth, inflation and unemployment has recently built a case for more stimulus. "We think the RBA will cut in June".

Speaking at an economists lunch in Brisbane yesterday, Dr. Lowe said a rate cut would be on the agenda at the June 4 meeting of the bank board.

"Members discussed the scenario where inflation did not move any higher, and unemployment trended up, recognising that in those circumstances a decrease in the cash rate would likely be appropriate", the minutes read. As many as 20 see a second move in August. The Aussie dollar dropped off to $0.6883, from around $0.6910, and threatened to re-test the recent 19-week low of $0.6865.

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The RBA's dovish tilt comes as growth in Australia's$1.3 trillion economy sputters.

Signs are domestic activity likely slowed in the three-months ended March to an annual 1.7%, the weakest since the 2008 global financial crisis.

The combination of lower interest rates and easy lending rules could help revive the country's crumbling housing market where prices are down nearly 10% from their 2017 highs.

"If instead, we had used an assumption of unchanged interest rates, the growth forecast would have been lower and the forecast for unemployment would have been higher", said Lowe. The timing could be clearer once RBA Governor Philip Lowe gives a highly anticipated speech later on Tuesday. The 10-year contract firmed 2 ticks to 98.3350.

Lowe said the main reason for the shift in the country's economic momentum - growth braked to an annualised 0.8% in the December quarter - was a slowdown in household consumption. The RBA predicts it will accelerate to 4% in the next couple of years, mainly due to government tax relief.

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