The RBA has maintained the last sentence, "taking account of the available information", since March 2017 – almost the entirety of Governor Lowe’s tenure. Yesterday’s change in the last sentence now implies that the RBA will shift course on monetary policy should growth continue to deteriorate and inflation continue to remain persistently below target.
Yesterday's change in the policy statement, coming in the wake of the February speech wherein Lowe recognised the mounting downside risks, is evidence of the RBA moving towards a more balanced outlook. "Looking forward, there are scenarios where the next move in the cash rate is up and other scenarios where it is down," Lowe said
. It is clear that the RBA’s bias is slowly shifting away from the stubborn optimism that has prevailed for so long.
These subtle hints of moving towards cutting rates if growth deteriorates imply that if the unemployment rate starts to pick up, the RBA will move fairly quickly. We don’t necessarily need to see unemployment move up in a big way, given that it has remained the RBA’s pillar of strength in the domestic economy. If this were to crumble, there is probably a relatively low threshold for moving to a cut.
The economy and the labour market will not continue to show divergent paths. While the labour market has been the one bright spot of the domestic economy, with unemployment now sitting at an eight-year low of 4.9%, stagnant wage growth means most people don’t feel the benefit. Construction is one of the largest employment sectors, making up nearly one in 10 jobs in Victoria and NSW. As residential construction activity deteriorates over the coming months, this will hit employment.
The multiplier effects of house price declines on the economy are yet to be felt and as declines continue, they will intensify. The housing slowdown will feed back to the real economy through the negative wealth effect, which will continue to weigh on over-leveraged households’ consumption, resulting in weaker GDP growth. With the current savings ratio near decade lows, consumers will no longer be able to hold up spending habits as asset prices continue to fall. House prices have continued to fall throughout the first quarter of 2019, and on that basis it doesn’t look like a reprieve is on the horizon. Employment will not continue to hold up as confidence is eroded and growth continues to lose momentum. The labour market remains resilient, but unemployment is a lagging indicator so the data only give us a rear-mirror view.
We don’t necessarily need to see unemployment move up in a big way; there is a low threshold for moving to a cut given that the option has been opened for a potential downwards move in the cash rate. In our view, this is inevitable. The RBA will move to cut the cash rate in the second half of this year, but so long as employment remains at a cycle low, the RBA will not fully capitulate on policy guidance.