Australia's RBA signals more rate cuts ahead, pace undecided

By Stella Qiu

SYDNEY (Reuters) -Australia's central bank board judged further policy easing would likely be needed over the coming year when it cut rates this month, and the pace could be gradual or quicker depending on the flow of economic data.

Minutes of its August 11-12 policy meeting showed the Reserve Bank of Australia saw a strong case for a quarter-point reduction in the cash rate to 3.6% as data had shown inflation was heading towards the mid-point of its 2-3% target band.

Policymakers also discussed the policy strategy over the coming year, adding that preserving full employment and maintaining low and stable inflation were likely to require some further cuts in the cash rate.

The board saw arguments for a gradual pace of easing and for a quicker series of moves, with the outcome uncertain as yet.

"It was important for the pace of decline in the cash rate to be determined by incoming data on a meeting-by-meeting basis," the minutes showed.

The central bank has tended to emphasise caution in easing, having only cut rates in February, May and August following the release of quarterly inflation data.

A gradual pace in policy easing may be warranted as the labour market remained somewhat tight, private demand was showing signs of picking up and there was much uncertainty about where the neutral rate was.

A faster pace could be needed if the labour market weakened and there was a risk inflation might undershoot the midpoint of the 2-3% target range. A global slowdown or renewed strains from U.S. tariff policy might also add to the case for quicker easing.

The minutes suggested upside risks to inflation have now been superseded by potential downside risks to the labour market, said Belinda Allen, head of Australian economics at the Commonwealth Bank of Australia.

"We currently see the cash rate troughing at 3.35% but if the pick-up in the economy is slower than we expect, further easing is likely over the coming year."

Investors are wagering the RBA will skip a move in September and wait until its November meeting to ease to 3.35%. Rates are seen settling around 3.10%, or perhaps as low as 2.85%.

Headline inflation eased to 2.1% in the June quarter, while the trimmed mean measure of core inflation hit a fresh three-year low of 2.7%. The labour market, on the other hand, is easing from full employment levels although at a gradual pace.

Employment rebounded in July and the jobless rate edged down from a 3-1/2-year high, calming concerns about a sharp labour market downturn.

The RBA said board members discussed whether the central bank should increase the pace at which its holdings of government bonds were running down, but they decided there should be no change to its current strategy of letting them mature.

(Reporting by Stella Qiu; Editing by Wayne Cole and Jacqueline Wong)

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