The Reserve Bank is widely expected to take a razor to interest rates again in coming months, but economists are divided on the timing.
The minutes of the RBA’s February meeting, released on Tuesday, show the board decided to cut Australia’s cash rate to a new record low of 2.25 per cent amid signs the economy wasn’t doing as well as was previously expected.
Indicators were suggesting that economic growth would pick up later than the RBA expected, while unemployment looked set to peak higher than originally forecast, leading the board to judge “that a further reduction in the cash rate would be appropriate to provide additional support to demand”.
But the minutes also revealed that February’s cut was a close call, with board members debating whether or not to postpone the cut until March.
The RBA ultimately decided to cut in February, allowing the opportunity for more detailed communication of its decision in the quarterly Statement on Monetary Policy, released three days after the February 3 meeting.
February’s rate cut came as a surprise to most economists, with most tipping a cut later in the first half of the year.
A growing band now expect the RBA to cut again next month, particularly after last week’s surprisingly weak employment figures.
RBC Capital Markets senior economist Su-Lin Ong said the minutes had hosed down expectations of a March cut, although the wording around exchange rate movements “pretty much confirms further cuts by the RBA at some point”.
It also suggested that cuts were being “heavily driven” by the RBA’s desire for a lower Australian dollar, she said.
RBC expected another quarter of a percentage point cut in May with the potential for further cuts later in the year, she said.
ANZ senior economist Felicity Emmett said the RBA’s discussion about whether to cut in February or March related more to communication around the move rather than the urgency of it.
ANZ expects the RBA to cut the cash rate to two per cent next month, “given the RBA’s historical tendency towards consecutive moves in the early part of a new cycle and its own research which suggests that the impact of one 25 basis point rate cut on the economy is negligible”, Ms Emmett said.
“With a cash rate of two per cent or less factored into the RBA’s forecasts, which have growth remaining below trend for at least another year, we expect that there is little reason for the RBA to wait and watch the data over coming months and continue to expect a follow-up move in March,” she said.
Commonwealth Bank and UBS economists are among those expecting a March cut, after last week’s surprise jump in the unemployment rate to 6.4 per cent.
