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The Reserve Bank of Australia’s (RBA) monetary policy board has held the official cash rate at 0.75 per cent.
This comes despite a sharp turnaround in sentiment ahead of the RBA’s board meeting, with the ASX’s RBA Rate Indicator (based on the market determined prices in the ASX 30 Day Interbank Cash Rate Futures) showing on Friday (28 February) that 18 per cent expected the RBA to cut the rate this week, but this had risen to 100 per cent on Monday (2 March).
In recent weeks, RBA governor Philip Lowe adopted a more hawkish tone regarding the state of the Australian economy, in light of stronger than expected labour market and inflation data, prompting the central bank to hold the cash rate in February despite initial expectations of a cut.
However, developments in the domestic and global economy are likely to have altered the RBA’s tone, with weak local market indicators and the coronavirus (COVID-19) outbreak rattling market confidence.
Among the analysts to forecast a cut was AMP Capital’s chief economist Shane Oliver, who observed: “The run of economic data since the last RBA meeting has mostly been soft with falls in retail sales, construction and business investment, weak confidence readings, continuing poor wages growth and a rise in unemployment and underemployment which in total were already high.”
“December quarter GDP is likely to show a renewed slowing in quarterly GDP growth.”
“The bushfires and the coronavirus will likely take the economy backwards this quarter with significant uncertainty around the duration of the hit from coronavirus.
“We were already a long way from the RBA’s full employment and inflation objectives and developments over the last month have likely taken us further away from them.”
Mr Oliver had also said that recent signalling from the RBA’s foreign counterparts of further easing would also compel the RBA to lower rates in order to keep the Australian dollar from inflating.
“If the RBA doesn’t ease and then the [Federal Reserve] cuts in two weeks’ time as now looks likely then the Australian dollar will likely rise which the RBA will want to avoid,” Mr Oliver said.
“Against the background of already weak economic growth and the threat of further weakness to come, the benefits of another interest rate cut – which also include keeping the [Australian dollar] down – likely outweigh the costs and so the RBA should be easing again.”
However, Mr Oliver acknowledged the RBA’s preference to “wait a bit longer” to better assess COVID-19’s impact and whether there is a more “material” rise in unemployment.
Managing director of mortgage aggregator Finsure John Kolenda also expected cut, stating that while it may not have an immediate impact on the economy, it could help restore some confidence.
“Unemployment rose last month, and we are still dealing with the impact of the devastating bushfires over the summer. The RBA, fortunately, still has some fuel in the tank to support the economy,” he said.
However, Mr Kolenda stressed that despite weakness in some economic indicators, the fundamentals of the domestic economy remain “solid”.
“Consumers should not be too alarmed by the negativity,” he said.
“The whole world is having to deal with the coronavirus, with our retail businesses and travel industry being hit on a number of fronts. Some parts of the economy are doing it very tough while others are ticking along.”
Nonetheless, Loan Market executive chairman Sam White, who is expecting the RBA to cut rates in the coming months, encouraged brokers to remain attentive to their clients' needs.
“It’s important that brokers maintain strong relationships with their clients at this point, value-adding to their existing service," he said.
"It’s at times like these - when global issues place pressure on markets - that clients look to their experts for guidance and reassurance.
“Ensuring they’re receiving the most competitive rate and best product to suit their situation, is part
of a broker’s everyday commitment to their customers.”
[Related: Shaky markets, looming Fed cut, to force RBA’s hand]
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