RBA puts faith in past rate cuts, looks through virus and fires


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The Reserve Bank of Australia is putting its faith in last year’s interest rate cuts to get households spending and lift the economy, resisting pressure to loosen monetary policy to head off potential fallout from the summer’s bushfires and coronavirus outbreak.

At its first meeting of the year on Tuesday, the RBA held the official cash rate at 0.75 per cent and talked up the economy’s fortunes, even as some analysts labelled the bank’s attitude “brave” and ignorant of the short-term risks facing the country.

Financial markets had been expecting interest rates, which the bank sliced three times between June and October last year, to remain steady on Tuesday but believe more cuts will be necessary by May.

But RBA governor Philip Lowe, who is due to address the National Press Club on Wednesday to talk about the coming year, signalled the central bank was comfortable with current interest rate settings and the economy’s prospects.

He said the economy would most likely expand by 2.75 per cent this year and 3 per cent in 2021, underlying inflation would “gradually” lift to the RBA’s 2-3 per cent target band and unemployment would slowly edge down. The recent lift in house prices, which has seen the median price approach $1 million in Sydney and $800,000 in Melbourne, was delivering a wealth effect to consumers that would ultimately boost the economy.

“Lower interest rates have assisted with the process of household balance sheet adjustment. They have also boosted asset prices, which in time should lead to increased spending, including on residential construction,” Dr Lowe said.

He said rates had already been reduced to a “very low level”, noting there were long and variable lags in their full impact. He cited other factors, including last year’s personal income tax cuts, government spending on infrastructure and a “brighter” outlook for the resources sector as helping the economy.

Some economists have already estimated the bushfires will cut economic growth by up to 0.5 per cent, with the spread of the coronavirus having a similar impact.

But the bushfires rated just one mention in Dr Lowe’s 779-word statement announcing the meeting’s outcome, while coronavirus was referenced twice. One of those references was specific to the impact on China, Australia’s largest trading partner.

“In the short term, the bushfires and the coronavirus outbreak will temporarily weigh on domestic growth,” Dr Lowe said.

The Australian dollar lifted to US67.25¢ from US66.9¢ following the RBA decision as expectations increased that the bank may have finished its latest round of rate cuts.

Westpac chief economist Bill Evans, who expects the RBA to cut rates by April, said it was “somewhat brave” of the bank to expect a recent drop in the unemployment rate to continue given the issues facing the economy.

“The uncertainty around the coronavirus poses substantial risks to economic forecasts but certainly the impact of the virus over the course of the first quarter both globally and domestically has to be quite damaging,” he said.

JPMorgan analyst Sally Auld said the RBA seemed to be confident its rate cuts of last year were working, either through higher house prices or a slip in the Australian dollar.

“More importantly, and given long and variable lags associated with policy changes, the bank is prepared to be patient in assessing the impact of last year’s easing,” she said.

BIS Oxford Economics analyst Sarah Hunter, like many economists, said the RBA seemed much more optimistic about the economy than was warranted.

“With the data for the start of the year likely to be very mixed, given the bushfires and the coronavirus, we expect the RBA to keep the cash rate at 0.75 per cent for now,” she said. “But as we’re much less optimistic than the board about the outlook for the economy, we expect at least one more cash rate cut in the middle of the year.”

The Indian Telegraphhttps://theindiantelegraph.com.au/
Established in 2007, The Indian Telegraph is a multi award winning digital media company based in Australia.

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