Daily Commentary BY THE CURVE TEAM –

RBA Watching and Waiting

5th of February, 2020

The RBA has remained in ‘wait and see’ mode despite acknowledging risks to the outlook.

At yesterday’s Board meeting, the RBA decided to leave the cash rate on hold, in line with market expectations. It appears that they have retained their current medium-term forecast that was last revised back in November, despite recent events posing risks to the outlook.

Contained within the accompanying statement was acknowledgement that the bush fires and Coronavirus are likely to have a negative impact on the economy over the short term. The RBA also said that “one continuing source of uncertainty, despite recent progress, is the trade and technology dispute between the US and China.” 

Despite these risks, the RBA still expect growth accelerating from an annual rate of 2.75% this year to 3% in 2021. Furthermore, they see the unemployment rate dipping below 5% over the forecast period and inflation edging back up to the bottom of the target band.

The reasoning behind the decision was best summed up by the opening sentence of their closing paragraph:

“With interest rates having already been reduced to a very low level and recognising the long and variable lags in the transmission of monetary policy, the Board decided to hold the cash rate steady at this meeting”

Essentially, the RBA is hoping that the rate cuts they have already delivered, along with recent tax cuts, will allow households to reach a position where they will eventually lift their level of consumption. Should that not materialise, they are “prepared to ease monetary policy further if needed.”

We now wait for Governor Lowes Address at 11:30 at the National Press Club, which is titled ‘The Year Ahead’, for more clues on the outlook for monetary policy.

David Flanagan

Director - Interest Rate Markets