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Shaky markets, looming Fed cut, to force RBA’s hand

The Reserve Bank “should” cut rates this afternoon amid growing market instability and expected easing from foreign central banks, according to one economist.

AMP chief economist Shane Oliver has said he is expecting the Reserve Bank of Australia (RBA) to cut rates for a fourth time in less than a year when its monetary policy board meets this afternoon.

The RBA cut rates in June, July, and October of 2019 in response to fledgling labour market conditions, subdued inflation and wages growth, and a weakening housing market.

The housing market has since rebounded; however, the RBA is yet to hit its targets of sustainable growth in the economy, full employment and 2-3 per cent annual inflation.

In recent weeks, RBA governor Philip Lowe has 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.

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However, according to Mr Oliver, recent developments in the domestic global economy would again alter the RBA’s tone, with weak local market indicators and the coronavirus (COVID-19) outbreak continuing to rattle market confidence.

“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,” he said.

“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 added that while the federal government has “relaxed” its focus on a budget surplus, he does not expect “significant fiscal stimulus” that would be enough to forgo the need for further monetary policy easing.

“This leaves all the pressure on the RBA in the short term,” he said.

Moreover, Mr Oliver noted 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.

“I get the feeling that the RBA would probably prefer to wait a bit longer – to better assess COVID-19’s impact to and see if there is a more ‘material’ rise in unemployment [but] things are moving fast around the threat from coronavirus with very sharp falls in share markets warning that the threat to the growth outlook is very serious.”

As a result, Mr Oliver is forecasting a 70 per cent chance of a rate cut this afternoon, which would lower the cash rate to a new record low of 0.5 per cent.

However, not all economists a forecasting a cut, with 85 per cent of analysts surveyed on comparison site Finder’s panel predicting a hold verdict.

[Related: Residential construction activity wanes]]

Shaky markets, looming Fed cut, to force RBA’s hand
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