Daily Commentary BY THE CURVE TEAM –

RBA Day

4th of February, 2020

Markets only have a slim chance of a rate hike priced in for today’s meeting but a cut can’t be ruled out.

A case can be mounted for both sitting put and cutting the cash rate a further 25bp’s when the RBA meets later today. Market pricing for February has been little changed in recent days, while expectations for rate cuts later this year continue to build. In the past 5 days pricing has gone from barely having one cut priced in to almost 2 by year’s end.

Following the recent dip in the unemployment rate, the uptick in the headline inflation rate and resurgent house prices, market pricing is suggesting that the RBA has time on its side. The Reserve Bank could sit back and see how the data evolves and hope that the wealth effect from rising asset prices helps support consumption and the broader economy.

The counter-argument is that the wealth effect from both rising and falling asset prices, has been weak in recent years. Risks to the economy are also growing, with exports expected to come under pressure from Chinese and local measures to limit the spread of Coronavirus.

Adding to the rate cut case is that the RBA is still some way off fulfilling their mandate. The unemployment rate still sits 0.7% above what is considered full employment and the level which is expected to start lifting wages growth once breeched. Core inflation is also anchored well below the RBA’s target band.

With risks firmly skewed to the downside and little risk of the economy overheating, there is little reason to hold fire.

David Flanagan

Director - Interest Rate Markets