RBA: Cash rate is heading lower - ANZ

David Plank, head of Australian economics at ANZ, points out that the RBA Governor spoke on The Labour Market and Spare Capacity at a CEDA event in Adelaide on 20 June and the critical takeaway from a monetary policy perspective is that the cash rate is heading lower.

Key Quotes

“We already knew this, of course, and the speech does not add much to our understanding of the speed or extent of the coming rate cuts. But clearly there is a very real chance the cash rate is cut in both July and August given the RBA’s assessment that “we are not making any inroads into the economy’s spare capacity.”

“The balance of the Governor’s speech was about how the RBA assesses the “degree of spare capacity in the Australian labour market.” The Governor looked at four perspectives:  rates of unemployment and underemployment; the flexibility of labour supply; matching people with job vacancies; and trends in wages growth.”

“The Governor concluded “with a few words on monetary policy.” These conclusions largely repeated comments made previously.”

“Turning back to the body of the speech, he highlighted the strong rise in part-time employment as an important structural shift in the Australian labour market that had implications for the level of labour market capacity. He also noted the improvement in labour supply, ie higher participation. NZ was seen as an important “source of flexibility” on the supply side. While these factors pointed to more slack, evidence of increasing job mismatch was evident with “almost 60 per cent of firms reporting that the availability of labour is either a minor or a major constraint on their business.”

“Finally, wage growth has been subdued. His key conclusion is that “there is still considerable spare capacity in the labour market” with “the one caveat to this assessment [being] the difficulty that some firms are having finding workers with the necessary skills.”