The rate decision by the Reserve Bank of Australia (RBA) won’t surprise anyone but before you turn your attention back to the Melbourne Cup, there are three interesting things that investors should be aware of.
Before I get into that, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index and the Australian dollar were largely unmoved by our central bank’s decision to keep interest rates on hold at 0.75% following last month’s move to cut the cash rate by 25 basis points.
Just about all economists were forecasting this outcome with many believing a fourth 25-basis point cut in this cycle will happen this February. The market isn’t so sure and the statement released by RBA governor Philip Lowe could hold clues on who may be right.
Inflation getting deflated
The first and most notable thing in the statement was that the RBA has essentially given up on inflation returning to its comfort zone of between 2% and 3% – at least not for a couple of years.
“In both headline and underlying terms, inflation is expected to be close to 2 per cent in 2020 and 2021,” said Dr Lowe.
“Wages growth remains subdued and is expected to remain at around its current rate for some time yet.”
I highlight this because in the past, the RBA would quickly add that wages growth will rebound eventually. This time round, all the central bank would say is “A further gradual lift in wages growth would be a welcome development”.
The weak inflation outlook is linked to the unemployment rate. The RBA is expecting the jobless rate to hold at around 5.25% for “some time, before gradually declining to a little below 5 per cent in 2021”. The central bank said previously that the unemployment rate needed to be around 4.75% before we see inflation (and growth) return to trend.
There were also numerous opportunities for the RBA to sound a little more positive on growth, but tone was decidedly downbeat, in my view.
The RBA mentioned that risks to the global economy were to the downside due in large part to the US-China trade and technology disputes. No mention of reports that the two countries are close to signing a partial agreement to ease tensions.
While it noted that expectations for looser monetary policy around the world is being scaled back, it said in the same breath that government bond yields (including Australia’s) were still close to record lows.
It also pointed out other positives like the rebound in key parts of the housing market, infrastructure spend and the pick up in the mining sector, but it always ended with downbeat points such as uncertain consumer spending and the drought.
Easing bias entrenched
The third thing to note is that the RBA still holds a firm easing bias. Dr Lowe ended by stating that the board stood ready to cut rates again if needed to support sustainable growth in the economy.
Given the two earlier points I made above, I get the clear sense that our economy needs further help.
I suspect the economists are right about a February rate cut.
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