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RBA Lowers Policy Rate to 1.25%. Two of Big Four Pledge to Pass the Cut to Market in Full

For the first time in 3 years, RBA lowered the cash rate by -25 bps to 1.25%, a fresh record low, in June. The rate cut had been well anticipated as the members sought to support the labor market and boost inflation. Further reduction is possible later this year. Whether monetary easing could stimulate the economy depends on a successful transmission mechanism. At the of writing this report, ANZ, first of the big four banks responding to RBA’s action, cut its mortgage rate by -18 bps. On the other hand, NAB and CBA would pass the cut in full to the market. Westpac has not yet revealed changes.

Globally, the members noted that “the downside risks stemming from the trade disputes have increased”. They also indicated that “growth in international trade remains weak and the increased uncertainty is affecting investment intentions in a number of countries”. In May, the member described growth in international trade as “declined” and investment intentions “softened” in a number of countries.

Concerning domestic developments, RBA remained concerned about the slow wage growth. It acknowledged the ongoing positive developments in the job market: increasing labour force participation, high vacancy rate skills shortages in some areas. Yet, steadiness of the unemployment rate (at around 5%) evidenced “little further inroads into the spare capacity in the labour market”. This would make it difficult for the unemployment rate to drop further This could be worrisome for the RBA as it believes the unemployment rate has yet to reach a point where wage growth would improve significantly. In April, the country’s unemployment ticked up +0.1 percentage point from a month ago to 5.2%. The wage price index steadied at +0.5% q/q qnd +2.3% y/y during the period.

Undoubtedly, policymakers are dissatisfied with inflation, acknowledging “lower- than- expected” inflation and “subdued inflationary pressures across much of the economy. Yet, they retained the view that inflation would “pick up”. With the near-term boost as higher petrol price. For the medium- to long- term, RBA maintained the forecasts that underlying inflation would reach “1.75% this year, 2% in 2020 and a little higher after that”.

The rate cut aims to “support employment growth and provide greater confidence that inflation will be consistent with the medium-term target”. Again, future action would be data-dependent. As suggested in the statement, the central bank would “continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time”.

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