Australia’s Reserve Bank doesn’t move on interest rates

APAC News AMP Capital Shane Oliver reports on RBA decision to keep rates on hold

At its first board meeting for the year the RBA leaves official cash rate at 0.75%

4 February 2020 | Shane Oliver, AMP Capital

Australia’s central bank (RBA) last eased rates back in October and it’s been on hold ever since. Today’s decision not to move on rate was in line with the market’s and our own expectations.

The RBA appears to have taken heart from the drop in the unemployment rate to 5.1% in December and the December quarter inflation results which were in line with its expectations. As a result it has decided to be patient.

What’s surprising though is that it has retained its expectation for economic growth to pick up to around 2.75% this year. Its confidence may reflect the run of better than expected data for retail sales, building approvals and employment over the last month or so.

Impact from major events

But the problem is that all of this has related to late last year and since then business and consumer confidence has weakened further not helped by the bushfires with the coronavirus posing a new threat.  

While we mostly agree with the RBA that the drag on growth from the bushfires and the coronavirus will be short term and temporary, it is likely to be more significant than the RBA is allowing for. And the risk is that it will linger longer particularly given the threat that both pose to tourism.

As a result we continue to see economic growth being constrained to around 2% this year, well below the RBA’s 2.75%. This in turn is likely to see unemployment drift up a bit, underemployment remains very high and wages growth and underlying inflation remain lower for longer.

All of which will mean that little if any progress towards the RBA’s full employment and inflation targets is likely this year.

Bias towards future cuts remains

As such, we continue to see the RBA cutting rates again in the months ahead ultimately taking the cash rate down to 0.25% by mid-year, unless fiscal policy is eased significantly.

In this regard it is worth noting that the RBA retains an easing bias, with its post meeting Statement noting that “It [the RBA Board] remains prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.”

Dr Shane Oliver is Head of Investment Strategy and Chief Economist, AMP Capital