RBA meeting: 4 things we learnt from the new policy decision release

Though Australia's GDP data came in weak during the June quarter, RBA Governor, Philip Lowe, expects growth to strengthen in 2020 and 2021.

Australia's official cash rate was left on hold at 1.00% when Governor Philip Lowe handed down his Monetary Policy Decision statement last week.

With interest rates currently sitting at a historic lows and Australia reporting its weakest GDP growth since the global financial crisis, below we take a look at some of the most important things we learnt from last Tuesday’s RBA announcement.

US-China trade tensions in focus

Though global trade tensions persist, a number of positive signs appears to have materialised in the last week or so, with the US and China committing to a new round of trade discussions in October.

On this front, the spokesman for China’s ministry of commerce, Gao Feng said that:

‘Efforts striving for substantive progress will be made in the 13th round of China-US high-level economic and trade consultations in early October.’

Indeed, as was pointed out in last Tuesday’s media release:

‘The trade and technology disputes are affecting international trade flows and investment as businesses scale back spending plans due to the increased uncertainty.’

Unsurprisingly then, markets rose in the days that followed this news, as optimism around a potential US-China trade resolution grows. Last Thursday, the NASDAQ added 139 points while the S&P500 gained 38 points. Markets were mostly flat on Friday.

Such optimism looks to have moderated somewhat, with ASX 200 futures pointing towards a flat start for the week.

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Consumption remains keenly watched

A confluence of factors, from low wage growth to a high debt burden have all weighed on the outlook for domestic consumption in recent times.

Indeed, as part of the RBA’s Financial Stability Review, conducted earlier this year, it was noted that ‘high household debt’ ranked as a key risk for Australian financial security.

Such a position was reiterated last Tuesday, with Governor Lowe noting that:

‘The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income and a stabilisation of the housing market are expected to support spending.’

Australia poised to return to growth

While GDP growth came in sluggish for the June quarter and domestic consumption remains problematic, Governor Lowe expects growth to strengthen incrementally in 2020 and 2021.

Such an outlook, noted the Governor is, ‘supported by the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets and a brighter outlook for the resources sector.’

Lower rates and for longer

Finally, and maybe one of the most closely watched from the latest Policy Decision statement, were comments surrounding the fact that Governor Lowe expects interest rates to stay lower for longer.

Exactly how low interest rates could go however, remains uncertain.

According to Reuters, for example, ‘most Australian economists expect two more rate reductions to 0.50%.’

By comparison, ANZ’s David Plant – head of Australia economies – has taken a bolder stance. In this instance, Mr Plant has argued that:

‘We think the RBA will judge that it has little choice but to ease further over the coming year, as the impact of the sharp domestic slowdown feeds into the labour market and the Bank is forced to respond to global policy settings.’

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