At the RBA minutes for the December meeting, policymakers affirmed that it was appropriate to leave the cash rate unchanged at 0.75%. While acknowledging stabilization in the economy, the members, however, noted that further easing would be possible. They pledged to reassess the economic development in February 2020 and act if needed. given the employment situations and subdued wage growth, we expect RBA to lower interest rate further in 1Q20. However, it will be unlikely for the policy rate to lower to 0.25%, after which the central bank will need to embark QE.

The central bank noted that the domestic economy has reached a “gentle turning point”. It, however, highlighted that “non-mining investment in 2019/20 was expected to be weaker than previously envisaged“. As noted in the minutes, recent rate cuts would support consumption over time. Yet, it also suggested that “data from lenders and information from liaison suggested that only a small share of borrowers had actively adjusted their scheduled mortgage payments following the reductions in interest rates“.

On the employment situation, the members judged that employment intentions had been moderate. Meanwhile, the weakest sector is related residential construction. In light of the soft wage growth in 3Q19, the central bank noted that private sector wages growth “had leveled out in recent quarters following its gentle upward trend of the previous couple of years”. The members were rather pessimistic about the inflation outlook. As they indicated, “the current rate of wages growth was not consistent with inflation being sustainably within the target range, unless productivity growth was extraordinarily weak, nor was it consistent with consumption growth returning to trend”.

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Concerning the effects of previous cuts, RBA noted that they have been “working through the usual channels of lower bond yields, a depreciation of the exchange rate and lower interest rates on mortgages”. The members also suggested that previous easing has stimulated the housing market. Despite concerns about the impacts of low rates on business and consumer confidence, the members judged the negative impacts would unlikely outweigh the stimulus to the economy.

On the monetary policy decision, RBA noted that it was “most appropriate” to leave the rate unchanged and to “continue to assess the evidence of how the easing in monetary policy was affecting the economy”. However, ongoing monitoring of the economic developments, including the labor market, would be important. The members pledged that they are prepared to “ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time”.

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