The RBA has indicated low rates are here to stay…but are even more cuts on the way?
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For the fourth month in a row, the Reserve Bank of Australia (RBA) left interest rates unchanged at 0.75 per cent.
The RBA’s interest rate cuts in June, July and October were credited with giving Australia’s economy a slight boost towards the end of last year.
Also helping the economy was an easing of trade tensions, IMF’s expectations for higher growth in 2020 and 2021, and low inflation.
But over the summer the bushfires and coronavirus took hold. And the RBA said it was too early to judge the impact.
“Members observed that it was too early to determine the extent to which growth in China would be affected or the nature of the international spillovers,” it said.
“The economic effects would depend crucially on the persistence of the outbreak and measures taken to contain its spread.”
But as usual, the key focus for the bank was inflation and unemployment, and whether their respective levels will reach the central bank’s target. While inflation remains anchored below the RBA’s 2-3 per cent target band, committee members concluded that a further reduction was “unnecessary at this stage”.
“In considering this case, the board took into account that interest rates had already been reduced to a low level and that there are long and variable lags in the transmission of monetary policy,” it said.
“The board also recognised that the incremental benefits of further interest rate reductions needed to be weighed against the risks associated with very low interest rates.”
“Internationally, concerns had been raised about the effect of very low interest rates on resource allocation in the economy and their effect on the confidence of some people in the community, notably those reliant on savings to finance their consumption.
“A further reduction in interest rates could also encourage additional borrowing at a time when there was already a strong upswing in the housing market.”
The RBA concluded by saying to reach full employment and the inflation target an extended period of low interest rates was needed.
The Commonwealth Bank told its clients it still expects two more rate cuts — in April and August; despite conceding rate cuts haven’t been as fast as expected.
“While we continue to believe the RBA will be happy to lower the cash rate if required, the hurdle and the length of time they may now take to make that decision could be longer than originally anticipated,” senior economist Belinda Allen said.
NAB and ANZ have also pencilled in two rate cuts and both confirmed to Stockhead this was unchanged. Both expect the first in April, but while NAB expects a second in June, ANZ expects it later in the year.
ANZ’s head of Australian economics David Plank also told Stockhead eyebrows were raised that the RBA was now talking about the downside of low interest rates.
“Certainly the RBA’s shift in focus — now talking about downside of low interest rates — was a material change and something we need to take into account,” he said.
However he also believed the RBA would continue to watch economic data at home and broad as well as the impact of the coronavirus.