RBA holds cash rate as economy weakens

The Reserve Bank of Australia decided to leave the official cash rate unchanged at 1% as the economy continued to show signs of weakness.

While the outlook for the global economy remained reasonable, the uncertainty around trade and technology disputes remained a pressing concern, said RBA Governor Philip Lowe in his statement.

Furthermore, the economic performance of Australia over the first half of the year continued to be muted — easing wage growth and falling home prices continued to dampen household consumption and spending.

"Looking forward, growth in Australia is expected to strengthen gradually from here. The central scenario is for the Australian economy to grow by around 2.5% over 2019 and 2.75% over 2020," Lowe said.

Recent market developments such as the back-to-back rate cuts, tax cuts, and the stabilisation of the housing market are expected to be the significant drivers for growth over the rest of the year.

In terms of employment, the joblessness rate continued to be an issue. The unemployment rate currently sits at 5.2%, and over the years, it is expected to go down slightly to 5%.

Lowe also said that there seems to be little upward pressure for wage growth. This, in turn, would remain a drag on spending and inflation.

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"Over the year to the June quarter, inflation was 1.6% in both headline and underlying terms. The central scenario remains for inflation to increase gradually, but it is likely to take longer than earlier expected for inflation to return to 2%," he said.

With regards to the housing market, Lowe said there is still a considerable softness despite signs of a turnaround, particularly in Sydney and Melbourne. Housing credit growth remains low even with record-low mortgage rates.

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Given these factors, Lowe said low interest rates would be needed for an extended period to reduce unemployment, boost inflation, and spur further activity in the housing market.

"The board will continue to monitor developments in the labour market closely and ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time," he said.

Lowe's statement seems to indicate that the bank is ready to ease monetary policy again if needed, said Shane Oliver, AMP Capital economist.

However, Oliver said it is highly likely that the unemployment rate would rise to 5.5% by the end of the year, urging the central bank to consider cutting rates further.

"The stimulus to date won't be enough to get wages growth up and inflation back to target, and so we expect the RBA to resume cutting rate later this year with 0.25% cuts in each of November and February," he said in a think piece in The Property Observer.