SYDNEY (Reuters) - Australia's central bank is set to cut interest rates if the labour market fails to show signs of improvement, an outcome brought closer by recent disappointing data on unemployment.
Minutes of the Reserve Bank of Australia's (RBA) May policy meeting on Tuesday dropped its oft-use phrase that "there was no strong case for a near-term adjustment to rates", suggesting a cut might be close.
Markets are wagering a 50-50 chance of an easing as early as June, which would be the first cut since mid-2016. RBA Governor Philip Lowe gives a speech later on Tuesday at which economists expect he may provide guidance of the timing of a cut.
"Members considered the scenario where there was no further improvement in the labour market in the period ahead, recognising that in those circumstances a decrease in the cash rate would likely be appropriate," the minutes showed.
Earlier this month, the RBA cut forecasts for economic growth while extending the timeframe for achieving a lower jobless rate and higher consumer prices.
Those predictions were based on the market assumption of at least two interest rate cuts this year.
"This implied that, without an easing in monetary policy over the next six months, growth and inflation outcomes would be expected to be less favourable than the central scenario," the minutes showed.
While economic data has generally disappointed in recent months, the jobs market has nonetheless remained resilient. However, the latest figures point to still-high spare capacity even as hiring beats forecasts.
Data released after the RBA's last meeting showed the unemployment rate ticked up from near decade lows to reach 5.2% in April, prompting many economists to predict a rate cut as soon as next month.
The labour market slack is one reason annual wage growth has stagnated at a tepid 2.3% while inflation has undershot the RBA 2-3% target for almost 2-1/2 years now.
"In view of the spare capacity that remained in the economy...members agreed that it was important to continue to pay close attention to developments in the labour market and set monetary policy to support sustainable growth in the economy and achieve the inflation target over time," the minutes showed.
The RBA acknowledged the effect of an even lower cash rate on the economy could be smaller than in the past given high household debt and crumbling property prices.
"Nevertheless, a lower level of interest rates could still be expected to support the economy through a depreciation of the exchange rate and by reducing required interest payments on borrowing, freeing up cash for other expenditure," the minutes showed.
A steeper-than-expected slowdown in the housing market is a key concern for policymakers, prompting Australia's prudential regulator earlier in the day to loosening assessment criteria that currently limit the amount customers can borrow.
The Australian Prudential Regulation Authority (APRA)on Tuesday proposed dropping a requirement for banks to use a minimum 7% interest rate when assessing borrowers' ability to service loans.
The proposed change would ease current credit constraints households face.
Importantly, the move "should enhance the effectiveness of the transmission of Reserve Bank rate cuts through the new borrowing channel by removing the floor of at least 7%," NAB said in a note.
(Reporting by Swati Pandey; Editing by Sam Holmes)
