Interest Rate in Australia

Australia - Interest Rate

RBA holds its ground in December

At its 3 December monetary policy meeting, the Reserve Bank of Australia (RBA) kept the cash rate unchanged at 0.75%, an all-time low. December’s decision, which was in line with the expectations of most market analysts, follows three cuts this 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.

Easing external downside risks, additional signs of a turnaround in the housing market and especially the variable lags in the monetary policy transmission mechanism were behind the Bank’s decision. Inflation ticked up from 1.6% in Q2 to 1.7% in the third quarter, thus moving marginally closer to the Bank’s 2.0%–3.0% target band. However, the unemployment rate inched up from 5.2% in September to 5.3% in October, thus moving further above the 4.5% level the RBA considers to be conducive to faster wage growth and inflation. Moreover, growth in H1 was subdued, restrained by falling housing prices, weak disposable income growth and lackluster investment activity, while muted retail sales in Q3 point to protracted weakness in household spending.

That said, on the plus side, the lower cash rate has already translated into a weaker Australian dollar, which is supporting the external sector as well as asset prices, which should eventually lead to stronger spending and underpin further improvements in the housing market. On the external front, although trade and technology disputes continue to dominate the global economic landscape, the measures adopted by the Chinese authorities and by a number of central banks around the world should partially offset economic weakness and sustain demand for commodities.

Looking forward, the RBA expects headline inflation to be close to 2.0% in both 2020 and 2021, although it noted that uncertain consumer spending dynamics and ongoing trade uncertainties remain key risks to the outlook. Against this backdrop, the Bank 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. Moreover, the Bank did not rule out further monetary easing.

Commenting on the RBA’s likely decisions ahead, Robert Carnell, chief economist and head of research for Asia-Pacific at ING, stated:

“The RBA’s calls for some supporting fiscal policy seem to be falling on deaf ears, with the government apparently intent on returning the budget to surplus. I think the market view could change on one single labour market number, and these are fickle figures, so a big win after the last big miss is not to be ruled out. But a further downside miss would probably tip the balance in favour of a February 2020 cut. If so, we probably wouldn't stop at one cut. But two would take policy rates to only 0.25%, and the next stop for the RBA would indeed be QE. I don't think they want to go there, but the data may provide them with little choice.”

The next monetary policy meeting is scheduled for 4 February.

FocusEconomics panelists are still weighing up the Bank’s latest decision.