What would it take for the RBA to ease rates further?
The Reserve Bank of Australia (RBA) November meeting minutes revealed there are ongoing concerns amongst board members about Australia's economy.
While board members noted the central projection was for the economy to remain broadly in balance, and consistent with the board's objectives, there were "significant uncertainties" on both sides of its baseline projection.
"Given that, members determined that they could afford to be patient while assessing what the incoming data reveal about their judgements on the extent of spare capacity, the outlook for the labour market and the degree of restrictiveness of monetary policy," the minutes said.
The RBA said members discussed developments that could materially influence their decisions at future meetings, noting that those decisions would be driven by how incoming data may alter the outlook for the economy.
Board members said if incoming data signalled the emerging recovery in demand was stronger than expected, further supporting employment growth, they would be more willing to keep the cash rate on hold.
"Members noted that such a scenario could emerge in several ways, including if global growth continued to be more resilient than forecast or if the strengthening in household income and wealth, combined with easier monetary policy than a year earlier, resulted in a larger-than-expected recovery in household spending.
"Another factor was if the incoming data caused the board to lower its judgement about the supply capacity of the economy.
"Members observed that this could happen if inflation remained high over coming months or if productivity growth proved to be weaker than expected."
Members also said if the board changed its assessment that monetary policy was still slightly restrictive, it would also be more inclined to leave the official cash rate where it currently stands at 3.6%.
"Members noted that any of these scenarios could limit the scope for further monetary easing, particularly with inflation having been above its target for much of the preceding few years," it said.
However, should the labour market weaken materially, it would be inclined to cut interest rates.
"Members observed that many indicators of the labour market had softened over the prior year. They noted the risk that employment growth in the market sector remains soft, which could occur if the uncertain economic outlook reduces firms' willingness to hire or if an emerging focus on cost-cutting results in layoffs.
"Alternatively, members noted that the recovery in GDP growth could prove to be weaker than expected if households are more cautious about spending than had been assumed.
"In both scenarios, excess capacity was likely to emerge and dampen inflationary pressures. If so, it would likely be appropriate to ease monetary policy to keep inflation at target and the labour market around full employment."
Board members agreed it was "not yet possible to be confident" about which scenario was more likely, which is why interest rates were left on hold in November.
The board said it remains "cautious and data dependent" as the end of the year approaches.
"Members committed to continue paying close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market.
"The board will remain focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome."
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