Australia Markets closed

Cut to cash rate likely 'appropriate': RBA

Stuart Condie
A cash rate cut looks near certain after RBA board members said it "would likely be appropriate"

The Reserve Bank of Australia looks likely to cut the cash rate in June after Governor Philip Lowe said board members would discuss the move at their next monthly meeting.

Minutes from the RBA's May board meeting released Tuesday had already showed board members explicitly acknowledging the likelihood of a cut if unemployment did not fall, but Dr Lowe made the agenda clearer still during a speech in Brisbane.

"A lower cash rate would support employment growth and bring forward the time when inflation is consistent with the target," Dr Lowe said in a speech to the Economic Society of Australia.

"Given this assessment, at our meeting in two weeks' time, we will consider the case for lower interest rates."

The speech came just hours after the release of the minutes, which showed RBA board members considered "a decrease in the cash rate would likely be appropriate" if inflation failed to pick up but unemployment did.

With the RBA having held the cash rate at its record low 1.5 per cent for a 33rd straight month, official data subsequently showed unemployment had instead risen to a worse-than-expected 5.2 per cent in April.

The Australian dollar ticked as much as 0.2 per cent lower against its US counterpart on the release of the minutes, but Dr Lowe's more pointed comments pushed it lower by another 0.6 per cent.

At 1536 AEST, the Aussie was worth 68.76 US cents, from a local session high of 69.29.

Growing numbers of economists have for months been predicting two 0.25 percentage point rate cuts by the end of 2019.

NAB markets economist Kaixin Owyong noted the minutes had dropped the reference to "not a strong case" for a near-term move in the cash rate.

"Accordingly, we still forecast a 25bp rate cut in June," Ms Owyong said, while St George economists Besa Deda and Janu Chan brought forward their predicted timetable for cuts to June and August, from August and November.

The RBA said, for a second month in a row, board members noted any stimulating effect on the economy of a cut would likely be less than in the past given households have historically high levels of debt and against the backdrop of a faltering housing market.

"Nevertheless, a lower level of interest rates could still be expected to support the economy through a depreciation of the exchange rate and by reducing required interest payments on borrowing, freeing up cash for other expenditure," the minutes said.

Royal Bank of Canada macro rates strategist Robert Thompson also pointed out that Tuesday's proposal by APRA to remove the 7.0 per cent floor rate mortgage lenders use in assessing serviceability - in favour of a 2.5 per cent buffer - could strengthen the case for a lower cash rate.

"These measures would enhance the effectiveness of rate cuts by allowing serviceability assessments to track RBA rate cuts more closely," Mr Thompson said.