CANBERRA: The Reserve Bank of Australia has kept open the door to another official interest rate cut amid growing concern faltering population growth is acting as a fresh drag on the economy.
While the slide in population growth is helping improve the jobless rate because fewer people are entering the labour market, it increases the danger that growth may soften further than expected in coming months.
Reserve Bank officials – whose main task is to keep unemployment and inflation low – are now juggling whether future rate cuts are needed.
The bank will almost certainly be forced to again trim its growth forecasts in next month’s quarterly monetary policy statement after warning on Tuesday in the minutes of its July board meeting that the economy probably showed in the second quarter compared to the first three months of 2015.
Speculation the Reserve Bank may opt for more monetary policy stimulus to put downward pressure on the currency comes after the Bank of Canada last week cut its official interest rate, and ahead of a likely reduction by the Reserve Bank of New Zealand on Thursday.
Canada, New Zealand and Australia are all eager for a lower exchange rate given falls in their terms of trade because of falling prices for commodities – energy, dairy and iron ore, respectively.
Reserve Bank governor Glenn Stevens will deliver his annual speech to the Anika Foundation in Sydney on Wednesday, almost a year to the day since he called for Australian businesses to lift their “animal spirits” given the economy’s healthy fundamentals – including strong population growth.
Since then, population growth has slowed. Macquarie Bank analyst James McIntyre – a former Treasury official – estimates the number of people in Australia rose by almost 400,000 in 2013, falling to 360,000 in 2014, he said. So far this year the number has gained just 160,000, Mr McIntyre said.
“The signs from the minutes are that the Reserve Bank is already discussing the population stuff,” he said.
“That weakening of the economy’s foundation – population growth – might be enough to get them over the line” for another cut.
The Reserve Bank for the first time on Tuesday highlighted the issue as a key to the puzzle of why the labour market has improved despite a weak economy.
They said on Tuesday that the easing in population growth over the past 12 months had “helped to reconcile” the conundrum between low economic activity and a relatively steady jobless rate, currently at 6 per cent.
Most economists said the comments indicated the bank still has an “easing bias” in place. Board members again warned that a lower Australian dollar was “both likely and necessary” given falling commodity prices, a statement implying intent as much as observation.
Offsetting that, the Reserve Bank issued a more upbeat view that the stimulation from low interest rates is helping offset a slide in mining investment and weak consumer spending. The lower dollar since last year and softer wages growth are also helping the economy adjust. The dollar traded at around US73.63¢ after the minutes.
