RBA's rate cut cycle - Where do we stand and what it means for consumers


In the last few days, the Reserve Bank of Australia has been on the spotlight, with monetary policy decision, monetary policy statement and an appearance of Mr Philip Lowe at the House of Representatives Standing Committee on Economics.

The central bank held the cash rate steady at 0.75 per cent this time, which was broadly in line with the market participants. In the second-half of 2019, we observed that some of the underlying fundamentals of the economy have been better.

The apex bank may reach around its much-awaited inflation target range of CPI at 2-3 per cent, and notes that CPI remains low and stable. In 2019, the CPI inflation was 1.8 per cent with even lower underlying inflation.

It expects CPI inflation to be around 2 per cent in the near term with fluctuation over the next couple of years.

A further rate cut is likely to drive the AUD to lower levels among other factors, and notably, the spot rate on AUDUSD FX contracts is presently trading around USD0.67/AUD (at around 1:47 PM AEDT).

Spot rates on the AUDUSD pair made decade lows during January 2020, with a slightly up move in CPI inflation and steady interest rates lately, the AUD has been stronger as against USD.

In its statement at the lower house before the Standing Committee on Economics, Mr Lowe reaffirmed forecast of 2.75 per cent and 3 per cent for 2020 and 2021, respectively.

The catalysts to these forecasts remains a stronger consumer spending, expansion of resources sector, recovery in dwelling investments, but not limited to renewed levels of infrastructure spending and growth in public demand.

It was noted that a ‘modest lift’ in global economic conditions supports the RBA’s view, and de-escalation in trade disputes has given some relief. Meanwhile, the Coronavirus outbreak could jeopardise output growth in China, and the impact could not be quantified yet.

December retail numbers came back to normal levels after November rally

As far as the consumer is concerned, the retail numbers released by the Australian Bureau of Statistics (ABS) came down from the highs of November numbers, which were driven by increasing consumer shift towards Black Friday, Cyber Friday sales period.

In fact, the sales period starts much early than Black Friday, which is observed on the Friday after Thanksgiving Day, and it continues through to the Christmas period in some cases.

Also, the intensifying sales are in part driven by pricing wars, online sales, and lately, the buying power created by buy now pay later providers.

ABS notes that y-o-y increase in online retail turnover was 1 per cent, increasing from 5.6 per cent to 6.6 per cent in December 2019.

Despite a 0.5 per cent fall in December 2019 over November 2019, Q-o-Q picture looks better with a 0.5 per cent increase in seasonally-adjusted terms, which rose 0.1 per cent in the September quarter.

Among the Q-o-Q gainers, retailing in household goods improved by 1.4 per cent, clothing -footwear-personal retailing improved by 1.5 per cent, departmental stores up 2.1 per cent, and cafes-restaurants-takeaway food services up 0.5 per cent.

Meanwhile, retailing numbers were lower in food retailing down 0.4 per cent and other retailing down 0.6 per cent, all on seasonally-adjusted terms.

Consumers can be rock solid, but that’d need convergence of multiple policy support

Consumption & households could set the trajectory for the RBA’s growth forecast, and it would need a mix of multiple policy support, including measures to improve income levels such as tax-cuts, employment and wage growth.

Source: RBA

RBA reckons that consumers might be in a period of debt reduction, following continued periods of low income growth, and the pick-up in the housing sector is likely to drive consumption in 2020.

Also, the bank expects that employment growth would pick-up as GDP growth picks-up, and improving GDP would help lower unemployment rates as well. Meanwhile, the bank revised down employment growth forecast as indicators moved sideways.

Further, labour markets and income growth are likely to set the trajectory for consumption, and a deterioration in labour market conditions could influence consumption given the levels of household debt.

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