The decision to cut the cash rate two weeks ago came down to a weaker outlook for jobs.
And so might a future decision to cut again, a possibility the Reserve Bank of Australia flagged on Tuesday.
Although the RBA frames its decisions in the context of the inflation outlook, the soft labour market is a theme running through the minutes of its monetary policy meeting on August 6.
The minutes of that meeting were released on Tuesday.
At that meeting, the RBA’s board chose to cut the cash rate to a new half-century low of 2.5 per cent.
A benign outlook for inflation allowed the move.
The big fall in the Australian dollar – about 15 per cent since its mid-April peak – had boosted the price of goods and services traded on international markets.
But the slight slowdown in the trend in employment growth, and the resulting weaker wages growth, were having an offsetting effect on prices.
“In the near term, these effects were expected to roughly offset one another,” the RBA said in the minutes.
So the labour market had bunted the inflationary effect of the lower exchange rate, meaning inflation would not be a bar to an interest rate cut.
The outlook for the labour market was a bit gloomier than it had been a few months earlier.
“The outlook for employment growth was slightly weaker than at the time of the May Statement on Monetary Policy, consistent with the revision to the GDP (gross domestic product) forecast,” the RBA said in the minutes.
While GDP growth was expected to pick up in 2014, lifting employment growth, the near term outlook was softer than it had been previously.
The problem is the rebalancing, passing of the baton, demand rotation, or whatever else the process of weaning the economy off the mining boom might be called.
“Non-mining business investment remained subdued and a range of indicators suggested this was likely to persist in the near term.
“Mining investment had been at a high level although it looked set to decline the high levels in the previous year,” the RBA said.
It’s clear the RBA is worried that the time between the mining wind-down and the investment pickup elsewhere might be uncomfortable long.
Which is why GDP growth is forecast to be “below trend” though to mid-2014 and why employment is expected to “remain modest over the next few quarters”.
And, in turn, which is why the RBA saw fit, with no threat to the inflation outlook, to give expression to its legislated mandate to pursue full employment by cutting the cash rate.
The unusually explicit wording of the minutes made it crystal clear that yet another cut might be needed, albeit not immediately.
