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What you need to know about the RBA’s interest rate decision today

Our central bankers appear to be a fairly upbeat bunch as they held interest rates steady at record lows but pointed to the positives in the economy.

The tone and language in the monetary statement by Reserve Bank of Australia (RBA) governor Philip Lowe stands in contrast to some of the doom and gloom that has emerged on our economic horizon recently.

This includes Prime Minister Scott Morrison warning that we may only be one election away from a recession if Labor wins government (although that’s probably a political judgement call and not an economic one) and warnings by some economists that the 4Q GDP data could point to flat or negative growth when it’s released tomorrow.

The RBA cheerleading squad

The more upbeat Philip Lowe may have given the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) a slight lift with the index paring deeper losses to be just 0.2% lower in the 30 minutes after the RBA’s decision was published.

We certainly don’t need anyone else to be talking down our economy given how fragile household consumption is. Perhaps this was why the RBA struck a more positive tone than at its previous meetings.

The central bank kept the cash rate at 1.5%, which was what everyone was expecting, but then went on to focus more on the positives than the risks in the accompanying statement – not quite what I had expected given the past commentary from these monthly meet-ups.

While Dr Lowe acknowledged that growth has slowed since the second half of 2018 and the downside risks have increased, the RBA is sticking to its GDP growth forecast of 3% this year even as some experts warn it might be hard to reach that goal given the weakness in the latest set of economic data.

Will the RBA cut rates soon?

UBS is one that has taken a dimmer view of our economy and its forecasts makes the RBA look like raging bulls.

“The UBS credit tightening thesis is playing out, with accelerating weakness across home prices, sales, loans, credit & approvals near a 5-year low,” said UBS in a note released yesterday.

“Meanwhile, Q4 partials were so weak we cut our real GDP forecast to just 0.2% q/q & 2.4% y/y (was 0.3%), further below market & the RBA (0.5%/0.6%). Unless there is a surprising lift in net exports, public, or a collapse in household savings lifting consumption, we can’t rule out a flat GDP. The risk of an early RBA cut is rising.”

There was certainly no hint from our central bank that a cut is on the table, not when Dr Lowe pointed to the big rally on equity markets that’s supported by growth in corporate earnings, strong Australian labour market, some pick-up in wages growth (finally!), rising business investment and the government spend-a-thon on public infrastructure.

It will be interesting to see what the official GDP figures out tomorrow will say.

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