The RBA has kept the official interest rate on hold at its February meeting, but speculation is rife when the next cut is coming

Graeme Salt Knowledge Centre, News Leave a Comment

Jack Derwin| Business Insider| 4 February 2020

Interest rates are on hold for now, but another cut is likely coming.

The Reserve Bank of Australia (RBA) announced on Tuesday that it had kept the official interest rates at 0.75% at its February meeting.

“With interest rates having already been reduced to a very low level and recognising the long and variable lags in the transmission of monetary policy, the Board decided to hold the cash rate steady at this meeting,” RBA Governor Phillip Lowe said in a statement.

Lowe and the rest of the RBA board seem satisfied for now that record low-interest rates are doing enough to stimulate Australia’s economy.

“The easing of monetary policy last year is supporting employment and income growth in Australia and a return of inflation to the medium-term target range. The lower cash rate has put downward pressure on the exchange rate, which is supporting activity across a range of industries,” Lowe said.

“Lower interest rates have assisted with the process of household balance sheet adjustment. They have also boosted asset prices, which in time should lead to increased spending, including on residential construction. Progress is expected towards the inflation target and towards full employment, but that progress is expected to remain gradual.”

While largely in line with expectation, a small number of economists have begun to suspect the RBA might not be as predictable as assumed.

Around one in ten economists had thought the official cash rate would be cut on Tuesday, according to a Bloomberg survey. But despite the broad consensus, there are a growing number of contrarians who doubt the decision remains quite so black and white.

Economists from banks ING, Deutsche and Morgans were all betting on a cut to 0.5%, which would constitute another record low. Given the ongoing, and as yet unquantified, economic damage the bushfires and now the coronavirus will wreak, the RBA could have been inclined to move preemptively.

“[It’s] splitting the difference between what the market thinks and what the RBA thinks,” Morgans analysts wrote in a note issued to Business Insider Australia before the decision. “The RBA thinks the economy is in pretty good shape, the market thinks it’s in need for help, so we forecast one further rate cut but it’ll stabilise there.”

On the other, more popular, side of the debate were all big four Australian banks, flanked by AMP Capital, HSBC, JP Morgan, Morgan Stanley, and UBS. Of those, only UBS and and AMP are pricing in a March cut. The big four are instead anticipating, with the current data, the RBA will wait until April to make an orderly move lower.

“It would be a genuine surprise [if the RBA cut in February]” IFM Investors economist Alex Joiner tweeted. “Data [hasn’t] thrown up any red flags and I personally wouldn’t think near term weakness from exogenous factors will be enough for the RBA to spend the limited policy space it has left.”

Better looking economic indicators heading into the end of 2019 have helped steady market jitters. A fall in the unemployment rate — a key RBA objective — in December helped alleviate some of the pressure for rates to be slashed once again.

“A further gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3% target range,” Lowe said. “Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.”

However, even while analysts thought there wasn’t a pressing enough case for an immediate cut, they wouldn’t rule it out amid threats to Australian economic growth.

“While we are not calling for an RBA rate cut until April, there is a risk of a rate cut at today’s meeting,” Commonwealth Bank chief currency strategist Richard Grace said in a note. “The RBA is likely to refer to the coronavirus in their accompanying monetary policy statement.”

While the RBA board did, in fact, refer to the coronavirus, it’s keeping its cards close to its chest, acknowledging the outbreak will only “temporarily weigh on domestic growth.”

With the February decision out of the way, analysts will now cast their eyes forward. The market had been pricing in a 50% probability of an April cut and 65% of one in May instead. While consensus may have doubted a February cut, the majority of economists expect the RBA will be forced to cut to 0.5% soon.

Exactly when however is anyone’s guess.

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