The Reserve Bank has left interest rates on hold at its first meeting of the year, despite the economic fallout from Australia’s bushfires and China’s coronavirus outbreak.
- The Reserve Bank has kept the cash rate unchanged at 0.75pc since its last cut in October
- RBA governor Philip Lowe says the bank will be focusing on jobs figures to decide whether further rate cuts are needed, but is open to them
- Analysts say Mr Lowe made surprisingly little mention of coronavirus and the bushfires in his post-meeting statement
The RBA’s cash rate remains at a record low 0.75 per cent, where it has been since the last 25-basis-point cut in October.
The decision to keep rates on hold was no surprise to analysts or traders, with the market pricing in just a 20 per cent chance that interest rates would fall in February.
In spite of the economic disruption caused by the bushfires already, many indicators have been slightly better than expected, with a small fall in unemployment and a slight increase in inflation in the latest ABS data.
However, markets are still anticipating a rate cut soon, with March seen as a 50/50 prospect, while traders are pricing in a two-thirds chance of interest rates being at 0.5 per cent or lower after April’s RBA meeting.
The Reserve Bank’s governor, Philip Lowe, did nothing to disabuse them of this view, although his post-meeting statement did hint that the Reserve Bank was not in any rush to cut.
“Due to both global and domestic factors, it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target,” Mr Lowe said.
“The board will continue to monitor developments carefully, including in the labour market.
“It 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.”
Even without a further cut in February, RateCity said that there are now more than 30 lenders offering variable mortgage rates below 3 per cent.
Bank expectations of Mr Lowe’s “extended period of low interest rates” are seeing many fixed rates well below 3 per cent as well, including five-year fixed mortgages for as low as 2.84 per cent from the subsidiaries of one of Australia’s big four banks.
Coronavirus, bushfires barely rate a mention
While Mr Lowe noted that both the bushfires and China’s efforts to contain coronavirus would weigh on Australia’s economy “temporarily”, he did not rank the disease outbreak as a greater threat to the global economy than the US-China trade war.
“One continuing source of uncertainty, despite recent progress, is the trade and technology dispute between the US and China, which has affected international trade flows and investment,” he said.
“Another source of uncertainty is the coronavirus, which is having a significant effect on the Chinese economy at present. It is too early to determine how long-lasting the impact will be.”
BIS Oxford Economics analyst Sarah Hunter said the lack of focus on those two major events was “surprising”.
“With the data for the start of the year likely to be very mixed, given the bushfires and the coronavirus, we expect the RBA to keep the cash rate at 0.75 per cent for now,” she wrote.
“But as we’re much less optimistic than the board about the outlook for the economy, we expect at least one more cash rate cut in the middle of the year.”