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(Australian Associated Press)
The Reserve Bank of Australia has resisted temptation to cut the cash rate from its record low 1.5 per cent, but a move could still be on the horizon after it flagged concerns at the pace at which unemployment is falling.
The central bank held the rate where it has been since August 2016 despite many economists tipping a cut in response to inflation slowing to zero over the March quarter.
Pressure seemed to grow on Tuesday when official retail trade data showed spending fell in chain volume terms over the same period, but the RBA said it was waiting to see whether a long hoped for pick up in wages growth eventuates.
Governor Philip Lowe appeared to hint that a cut was possible if unemployment falls so gradually as to keep a lid on wage growth.
“The board judged that … a further improvement in the labour market was likely to be needed for inflation to be consistent with the target,” Dr Lowe said.
“The board will be paying close attention to developments in the labour market at its upcoming meetings.”
The Australian Bureau of Statistics will publish April’s labour market data next Thursday.
Dr Lowe welcomed reports of skills shortages in some sectors and signs of wages growth related to employment growth over the past year, but noted that any further rise in salaries is likely to be gradual.
“Any kind of deterioration in the job vacancies data or firms’ employment intentions could trigger a rate cut,” said BIS Oxford Economics chief economist Sarah Hunter, adding that she expects the RBA to remain on hold in the near term.
The recent slowdown in inflation made the RBA’s already optimistic target near impossible, and many economists have been predicting as many as two 0.25 percentage point cuts before the end of 2019.
A cut to the cash rate could help stimulate consumer spending and boost economic growth, particularly if banks reduce mortgage rates so customer repayments drop and they have cash to spend elsewhere.
The RBA board is counting on rising fuel prices to support a gradual pickup in inflation, but Dr Lowe – who acknowledged in his statement that global risks had tilted to the downside – said the RBA was now looking for inflation of 1.75 per cent this year and 2.0 next.
Its targets were still 2.0 and 2.25 per cent respectively last month, while it will formally update economic forecasts in Friday’s statement on monetary policy.
Capital Economics senior economist Marcel Thieliant said the RBA had adopted an implicit easing bias by noting that there was still some slack left in the economy.
“The upshot is that we still expect rates to be lowered over the coming months,” he said.
The Australian dollar spiked nearly half a cent against the US dollar.
At 1525 AEST, it had retreated slightly but was still worth 70.38 US cents, from 70.00 just before the RBA decision.