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The RBA holds cash rate steady

Earlier this week, the RBA announced that it would maintain the cash rate at 1.00%, after reducing it in both June and July – a decision that was widely expected by investors. We analyse what lies ahead.

What happened?

  • The Reserve Bank of Australia announced on 3 September that it would maintain the cash rate at 1.00%, after reducing it in both June and July.

MARKET REACTIONS

  • The decision was widely expected by investors. As a result, the Australian equity market was unaffected by the announcement. The All Ordinaries Index closed 4 points lower.
  • The AUD rose slightly versus the USD to 0.6732.

Analysis

  • Given that the RBA reduced policy rate in June and July, and the usual lag of around 9 months in the transmission of monetary policy to the level of real economic activity, the hurdle for another rate cut in September was always high.
  • The main change since the last rate cut in July is a further deterioration in external economic environment, due to a combination of the escalation in trade tensions between the US and China, and disappointing economic data from China and Germany.
  • Domestic economic indicators have been mixed since the last RBA meeting:
    • the housing sector has shown further signs of improvement with auction clearance rates increasing sharply in both Sydney and Melbourne, as well as price rises in Sydney and Melbourne;
    • consumer sentiment, as measured by the Westpac-Melbourne Institute Consumer Sentiment Index, has improved, but growth in retail sales remain weak;
    • growth in export has so far remained strong despite the deteriorating external environment;
    • unemployment rate remains steady at 5.2%.
  • The RBA policy statement was mildly dovish. It noted that “the outlook for the global economy remains reasonable, although the risks are tilted to the downside” due to trade and technology disputes. It highlighted the weakness in household consumption and acknowledged that economic growth “has been lower than earlier expected”. On the other hand, it also noted the recent recovery in house prices and pointed to a number of factors which should support economic growth.
  • We expect the RBA to maintain an easing bias given the generally soft domestic data and the high level of uncertainty on the external economic backdrop. However, barring a significant deterioration in external environment, the RBA will likely adopt a “wait and see” attitude until the end of 2019 and possibly early 2020.
  • We also believe that there is a high likelihood of the RBA adopting some forms of unconventional monetary policy if the cash rate reaches 0.50%. The likely timing is around mid-2020.

 

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

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