RBA Minutes of the October Meeting: Debunking the On Hold Case

The key points in this report are:

 

  • The minutes of the Reserve Bank’s (RBA) October board meeting provided greater insight into the decision to lower the cash rate to 0.75%. It was the third time the cash rate has been lowered this year.
  • There was extensive discussion over the case for and against easing policy further. The RBA pointed out that unemployment and inflation outcomes were “likely to be short of the Bank’s goals”. Over the course of this year, we have been highlighting the risk that the unemployment rate would head higher, and that inflation is unlikely to return to the RBA’s 2 to 3% target over the medium-term.
  • The RBA provided counterveiling arguments against all the rationales for not moving interest rates. Consequently, the RBA concluded that the arguments against easing were insufficient.
  • The RBA highlighted that it was the “level of interest rates” which was the key driver of demand rather than changes in interest rates, which supported the case for lower rates sooner rather than later in the face of increased downside risks.
  • On the effectiveness of policy, the RBA recognised “the negative effect of low interest rates on the income and confidence of savers might be more significant”, but noted the more positive impact on debt holders.
  • The RBA’s expectation for economic growth to pick up to a pace of growth close to trend remains unlikely. Moreover, the discussion against the case for leaving rates on hold in the October meeting suggests the RBA is open to lowering official interest rates again. We continue to expect that the RBA will lower the cash rate another 25 basis points. February remains the most likely timing but an earlier move cannot be ruled out.

 

Please see the attached report for more information



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