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The RBA made the decision at their February 4 Board meeting to not change the cash rate from its current record low 0.75%.
Economic growth in Australia is continuing at just a modest pace, with businesses and consumers lacking confidence about the economic future. That led many to believe that a further rate cut may have been in store in February. However, some economic indicators have been more positive, including a stronger than expected jobs gain of 29,000 in December, indicating that the economy may not be as weak as some fear. In addition, the phase one US-China trade deal and easing tensions between Iran and the US had restored some confidence to stock markets, seeing the ASX200 hitting a record high in January.
The RBA could also do with some more time to gauge the effects of last year’s rate cuts on the economy. Clearly, the rate cuts helped spark a big swing in the Sydney and Melbourne housing markets, with prices moving up strongly in the second half of 2019. That may help to support an earlier turnaround in housing construction activity (still heading down) through 2020.
More than usual, there are a lot of unknowns about the short-term economic future. The economic impact of the bushfires and coronavirus are not yet fully known, but as their impacts take hold it may bring forward the anticipated decision of a rate cut later this year. Some analysts are predicting that the coronavirus will have a larger impact on China’s economy than SARS did, which stunted China’s GDP growth by 2 percentage points in just one quarter. Such an impact would have a significant flow-on effect to Australia, with commodity prices (and the $A) already feeling the impact. Australia’s travel bans, if in place for an extended period of time, will also have a significant impact on our international education and tourism sectors.
The RBA is aware of these concerns, noting:
Previous outbreaks of new viruses have had significant, but short-lived, negative effects on economic growth in the economies at the centre of the outbreak. It is difficult to know how representative these earlier episodes could be. The economic impact will depend crucially on the duration of its impact and measures taken to contain the spread of the virus.
Similarly the US Federal Reserve also indicated it would likely keep benchmark rates steady this year, while also acknowledging the potential dangers to the global economy stemming from the coronavirus. It said that the virus “could lead to disruptions in China that spill over to the rest of the global economy.”
With a relatively greater exposure to China’s economy than the US, the RBA may need to blink first. At this stage, futures markets are showing that at least one rate cut in Australia is almost certain by the middle of the year.
For now, its wait and see, with the fallout partly playing out in a lower $A (hitting an eleven-year low against the $US).
David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis. David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.
Joseph joined Deloitte Access Economics in 2019 after completing a bachelor of economics with honours. Since then he has assisted public and private sector clients with electricity market modelling, regulatory issues and policy analysis. Joseph also contributes to Deloitte’s Tourism and Hotel Market Outlook and is part of the Financial Advisory Energy Transition Team.