Australia Monetary Policy February 2020

Australia

Australia: RBA holds its ground at first meeting of 2020 but keeps door open to further cuts

February 4, 2020

At its 4 February monetary policy meeting, the Reserve Bank of Australia (RBA) kept the cash rate unchanged at 0.75%, an all-time low. February’s decision, which was in line with the expectations of most market analysts, follows three cuts last year, the latest one having taken place in October. The RBA’s dovish tone again signaled that further monetary policy easing could be on the cards in the coming months.

Justifying the decision to stand pat, Governor Philip Lowe stated that the “outlook for the global economy remains reasonable” and that global economic growth is expected to pick up somewhat this year and next. The Central Bank statement also cited the solid labor market, additional signs of a turnaround in the housing market, and the “variable lags in the transmission of monetary policy”. Inflation ticked up from 1.7% in Q3 to 1.8% in the Q4, thus approaching the Bank’s 2.0%–3.0% target band. Moreover, the unemployment rate inched down for a second consecutive month in December from 5.2% in November to 5.1%, thus moving closer to the 4.5% level the RBA considers to be conducive to faster wage growth and inflation. Meanwhile, although growth weakened in Q3, restrained by lackluster consumer spending and falling investment activity, low interest rates and the turnaround in the housing market suggest the economy could have gained some steam in Q4.

Looking forward, the Bank left the door open to further monetary easing and reiterated that “an extended period of low interest rates will be required in Australia” in order to reduce unemployment and bring inflation to within the target range. The RBA expects bushfires and the coronavirus outbreak to have only a short-term effect on economic activity and sees headline inflation hovering around 2.0% in both 2020 and 2021, although uncertainty surrounding consumer spending dynamics and protracted trade uncertainties remain key risks to the outlook.

Reflecting on the decision, Francesco Pesole, FX strategist at ING, noted:

“In our view, the RBA has likely remained too sanguine on the economy, and we remain of the view that more easing will be necessary in the coming months, especially considering the high exposure of Australia to the Chinese economy (which will likely slow on the back of the coronavirus).”

The next monetary policy meeting is scheduled for 3 March.

FocusEconomics panelists expect the Bank to ease its monetary policy stance further next year and forecast the cash rate to end 2020 at 0.46% and 2021 at 0.47%.


Author: Massimo Bassetti, Economist

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Australia Monetary Policy February 20 20

Note: RBA Cash Rate in %.
Source: Reserve Bank of Australia (RBA).


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