This week’s decision by the Reserve Bank of Australia to keep interest rates on hold at 0.75 per cent, together with RBA governor Philip Lowe’s national press club speech on Wednesday, have “tipped the odds in favour of the RBA now remaining on hold through 2020,” the Goldman Sachs economics team said.
The economists noted that there are “a number of quite feasible scenarios” where the RBA may start to cut ease policy again, a decision that would be “easily defendable on a literal interpretation of the RBA’s mandate given how far the economy remains from the RBA’s inflation and unemployment objectives.”
The economists downgraded their calendar 2020 GDP growth forecast by 30 basis points to 2.4 per cent. The downgrade incorporates a moderate contraction in first-quarter GDP of 0.2 per cent quarter-on-quarter.
The forecasts factored in a 30 basis point drag on quarterly growth from the bushfires and a 60 basis point drag to quarterly growth from the coronavirus “before a relatively quick rebound in activity from the second quarter of 2020.”
“We expect the RBA to reveal similar-sized downgrades to its 2020 growth forecasts in Friday’s Statement on Monetary Policy” it said.
But they also believe that the speech from governor Lowe “signaled a strong reluctance to cut rates and preparedness to look through both near-term weakness in GDP and an ongoing undershoot of the RBA’s inflation/unemployment targets.
“Absent a steady rise in the unemployment rate over a couple of months (not our base case), rates on hold in 2020 now looks to us the most likely scenario – particularly given Governor Lowe’s renewed concerns around low rates, house prices and financial stability.”
“This week’s RBA guidance has confirmed a number of important nuances around its reaction function, and we now expect the cash rate will remain at 0.75 per cent for at least a couple of years.”