Cash rate still heading south despite upbeat RBA: AMP

On Tuesday, the Reserve Bank of Australia (RBA) held the official cash rate at 0.75 per cent, in line with industry expectations.

The central bank was initially expected to cut the cash rate in February. However, RBA governor Philip Lowe confirmed that stronger than expected employment and inflation data influenced the RBA’s hold verdict. 

In an address to the National Press Club, Mr Lowe observed: “The recent inflation and unemployment data were both in line with our expectations and show things moving in the right direction, although only very gradually.

“Over the next couple of years, we expect further progress to be made towards full employment and the inflation target, although that progress is likely to remain quite slow.”

However, chief economist at AMP Capital Shane Oliver noted that he was surprised by the level of optimism in the RBA’s statement on monetary policy, given recent hits to consumer confidence associated with the bushfire crisis and coronavirus pandemic.

“What’s surprising [is] that [the RBA] has retained its expectation for economic growth to pick up to around 2.75 per cent this year,” he said.

“[The RBA’s] confidence may reflect the run of better than expected data for retail sales, building approvals and employment over the last month or so, [but] the problem is that all of this has related to late last year and since then business and consumer confidence has weakened further not helped by the bushfires, with the coronavirus posing a new threat.”

Mr Oliver continued: “While we mostly agree with the RBA that the drag on growth from the bushfires and the coronavirus will be short-term and temporary, it is likely to be more significant than the RBA is allowing for, [and] the risk is that it will linger longer particularly given the threat that both pose to tourism.”

In light of such headwinds, Mr Oliver added that he expects economic growth to remain “constrained” to around 2 per cent in 2020.

“This in turn is likely to see unemployment drift up a bit, underemployment remains very high and wages growth and underlying inflation remain lower for longer – [all] of which will mean that little if any progress towards the RBA’s full employment and inflation targets is likely this year.”

As a result, Mr Oliver is forecasting two additional monetary policy adjustments by mid-2020 in the absence of fiscal stimulus, which would take the official cash rate to a lower bound of 0.25 per cent.

In its statement on monetary policy, the RBA’s monetary policy board maintained that 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”.

[Related: Cash rate decision announced]