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The RBA holds the cash rate at 0.75%

The RBA’s decision to keep the cash rate at 0.75% in February was fully anticipated by markets and was a relative ‘non-event’, overshadowed by developments with the Coronavirus.

WHAT HAPPENED?

  • The Reserve Bank of Australia (RBA) decided to hold the official cash rate at 0.75% at its February board meeting on Tuesday.

MARKET REACTIONS

  • The RBA’s decision was fully anticipated by financial markets and was a relative ‘non-event’, overshadowed by developments with the Coronavirus.

  • The All Ordinaries Index rose by around 0.4%.

  • The AUD rose versus the USD to 0.6756.

ANALYSIS

  • Today’s decision marks the third RBA board meeting in a row where the RBA has left the cash rate unchanged at 0.75%. After reducing the cash rate from 1.5% at the beginning of 2019 to 0.75% in October 2019, the RBA is still in ‘wait and see’ mode to assess the full impact of the cash rate reduction in 2019.

  • The decision was made in an environment of slightly firmer domestic economic data and tentative of stronger economic growth overseas, coupled with negative impacts from the bush fires and the Coronavirus:
  1. Retail trade increased by a stronger-than-expected 0.8% in November. The unemployment rate fell to 5.1% in December 2019. However, full-time employment fell slightly and leading indicators of employment growth continued to be subdued.
  2. While December quarter CPI was slightly above market expectations, both the headline CPI inflation of 1.8% and underlying inflation of 1.6% – as measured by the trimmed mean – were still below the RBA’s official inflation target of 2.0% to 3.0%.
  3. Both business and consumer confidence remained subdued.
  4. House prices continued to stage a very strong recovery since reaching a trough mid-year. House prices in Sydney and Melbourne surged by 6.2% and 6.1% respectively during the December quarter.
  5. There is some evidence that the main overseas economies are beginning to generate stronger growth, aided by the Phase 1 trade agreement between the US and China.
     
  • The RBA statement surprised on the positive side in its tone, stating that “the central scenario is for the Australian economy to grow by around 2.75% this year and 3% next year”. Furthermore, the central bank stated that “consumption growth is expected to pick up gradually” and that “inflation is expected to increase gradually to 2% over the next couple of years”.
  • While the statement acknowledges the uncertainty generated by the Coronavirus in China, it also emphasised the difficulty in determining any of its long-lasting impacts. 
  • Overall, the statement paints a picture of a central bank which is in no rush to change interest rates. However, we continue to expect the RBA will maintain an easing bias given recent domestic economic data. The Coronavirus has added a degree of uncertainty to Australian monetary policy and marginally increased the possibility of a cash rate reduction in the next two meetings. The recent negative headlines, both domestically and from China, are also still to be reflected in economic data. We expect some weakness in future, especially survey-based ‘soft’ data over the coming months. 

 

 

Written by George Lin, Senior Investment Management, Colonial First State

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