At its February board meeting the RBA has left interest rates on hold yet again. Despite some debate as to whether rates might be cut further, and a realistic chance that this would eventuate, the board has taken advantage of better economic data released over past few weeks to adopt a ‘wait and see’ position.
That economic data mainly relates to the end of last year: November retail sales strengthened slightly; jobs figures and building approvals for December were encouraging; and inflation numbers weren’t low enough to push the Reserve Bank into another rate cut. Stacked against the good news contained in that data, both the recent bushfire crisis and the outbreak of a new coronavirus in China are likely to impact negatively on the economy, with the latter affecting us indirectly through business and consumer confidence but also directly through its impact on tourist and student arrivals.
In other words, even as interest rates remain on hold, we should be preparing for cuts in the near future as the economy continues to underperform and spare capacity continues in the labour market. Inflationary pressures, judging from recent data around food costs, is expected to remain low.
So, watch out for up to two more rate cuts from the RBA this year, with one coming in in the next month or so, and another soon thereafter, taking the official cash rate down to 0.25%. The next question, which we’ll probably encounter in the second half of the year, is whether the Reserve Bank undertakes a program of quantitative easing and what form that might take.
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