Australian rates sink to all-time low amid labour concerns

In line with market expectations, the Reserve Bank of Australia (RBA) cut its policy rate by 25 bps to 1.25%.

The recent loss of momentum in the labour led to the move, which was the first time the central bank has eased monetary policy since August 2016.

The RBA noted that the cut will “support employment growth and provide greater confidence that inflation will be consistent with the medium-term target”.

Employment growth has remained robust, but forward indicators of labour demand have weakened.  Unemployment and underemployment rates have increased over the past few months, suggesting that there still appears to be some spare capacity in the economy.

Wage growth appears to have bottomed, but further tightening in the labour market is needed for inflationary pressure to start to rise, as underlying inflation measures remain well below the RBA’s inflation target.

Amid low wage growth and falling house prices, the outlook for household consumption continues to be the main domestic uncertainty.

The Bank also highlighted the risk of stronger global headwinds from trade wars, given the strong trade link between Australia and China noting in its post-meeting statement that “the downside risks stemming from trade disputes have increased”.

We expect the RBA to deliver another 25bps rate cut in August, as the Bank claimed that it will “continue to monitor developments in the labour market closely and adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time”.