RBA Keeps Interest Rate Unchanged at 0.75%, Decision Largely in line with Market Expectations

To recall, the ABS declared an unanticipated decline in the unemployment rate and better-than-expected inflation figures last month. The data demonstrated a fall in the unemployment rate to 5.1 per cent in December 2019, and a rise of 0.7 per cent in CPI in December 2019 quarter. Following the release of the ABS data, market experts pushed out the chances of an interest rate cut call ahead from February 2020.

The RBA has maintained its growth forecasts in its recent meeting, providing a positive assessment of the nation’s economic outlook. The central bank continues to wait for any additional improvement from the three interest rate cuts undertaken in 2019.

As a consequence of the RBA’s interest rate decision, the AUD/USD jumped to 0.6711 on 4^th February 2020, recovering from multi-month lows amid fears of coronavirus outbreak.

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Let us now gaze through the key highlights of the bank’s monetary policy meeting:

Coronavirus and Bushfires to Weigh on Economic Growth

The RBA expects the coronavirus outbreak and bushfires to weigh temporarily on the nation’s economic growth in the short-term. Market experts believe that the combined impact of bushfires and coronavirus has apparently put the country into an economic turmoil.

Economists have warned that bushfires could take off about $10 billion or 0.5 per cent from the nation’s GDP, with coronavirus wiping out another 0.2 per cent.

The devastating bushfires have engulfed over 10 million hectares of land, taking lives of about 27 people and millions of animals and destroying about 2,000 homes in the last five months. The potential economic cost of bushfires has been estimated at more than $5 billion by the market experts.

The nation was still counting the cost of wildfires on the economy, and the coronavirus has become the new ghost in the town. The coronavirus outbreak is set to bring more pain for the bushfire-affected exporters as China is the country's largest export market.

Moreover, the Australian PM, Mr Scott Morrison has recently enforced a travel ban on arrivals from China in a bid to contain the spread of the virus, shedding tourism and education sectors into a turbulence, probably disrupting trade.

The travel ban on China is being considered as a substantial financial blow to the Australian economy as Chinese students and tourists inject about $16 billion into the country’s economy every year. In addition, about 1.4 million Chinese tourists visit the nation each year, along with about 200k students attending Australian schools and universities.

As per the RBA, though the coronavirus affecting the Chinese economy remains a source of uncertainty at present, it is too early to ascertain how long-lasting the effect will be.

RBA’s View on Unemployment Rate and Inflation

The central bank expects the unemployment rate to remain at 5.1 per cent level for some time now, prior to declining below 5 per cent in 2021. Australia recorded an unexpected fall in the unemployment rate in December 2019, reaching to its 9-month low level at 5.1 per cent.

The result was better than the market experts’ projections of jobless rate staying at 5.2 per cent. The improvement in the jobless rate was supported by a considerable increase in part-time employment of 29,200 people during the month.

As per the central bank, the wage growth is subdued in the country, and a gradual lift in the wage growth is needed to keep inflation within 2-3 per cent target range. In addition, the bank pointed out that the recent outcomes demonstrate that the country can withstand lower rates of underemployment as well as unemployment.

The RBA expects the CPI inflation to stay near 2 per cent in the near term and to vary close to that rate over the next few years. The central bank noted that inflation remains stable and low, being at 1.8 per cent over 2019 and a little lower than this in underlying terms.

The bank further anticipates a gradual increase in inflation to 2 per cent over the next couple of years in underlying terms. Though the central bank expects a progress towards full employment and the inflation target, it believes that progress will be gradual.

Established Housing Markets Continue to Show Signs of Pick-Up

The central bank has noted continuing signs of a growth in established housing markets while taking its monetary policy decision.

A recent report by the property consultant, CoreLogic showed that the nation’s housing market continued to rebound in 2020, with national home value index surging by 0.9 per cent in January. Apart from regional South Australia, the property values increased across all the capital cities and the rest-of-state region.

Sydney and Melbourne continued to lead the property market, with housing values climbing up by 1.1 per cent and 1.2 per cent, respectively in January 2020. Besides these two capital cities, Hobart attained a higher growth rate of 0.9 per cent in comparison to other regions.

It is worth pointing out that Perth’s property values edged 0.1 per cent higher during the month, emerging slowly from a downturn experienced in the last five years. Similarly, Darwin, wherein the values have been consistently dropping, recorded a subtle rise of 0.1 per cent over the month.

Though the last month’s property prices data provided an optimistic outlook of the housing market, the recent dwelling approvals statistics announced by the ABS tell a different story.

As per the ABS, the total dwellings approved declined by 0.2 per cent in December 2019 in seasonally adjusted terms, after observing a rise of 10.9 per cent in November. Both dwellings excluding houses and private houses plummeted by 0.1 per cent in December.

ALSO READ: Australian Property Market Observed a Surge in Loan Commitments in November

Although the total dwellings approved fell, the value of total building approved increased by 13.4 per cent in December 2019 in seasonally adjusted terms.

What came as a surprise for the market experts was that the RBA stayed firm on its growth forecasts, still anticipating an economic growth of 2.75 per cent in 2020 and 3 per cent next year. Economists opine that the central bank’s forecasts are exceedingly optimistic amid bushfires and coronavirus outbreak. Moreover, the financial markets are now pricing in a 66 per cent possibility of an interest rate cut in April 2020.