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Interest rate decision: Reserve Bank of Australia delivers first decision for 2020 amid coronavirus

Pictured: Australian houses, Australian cash suggesting RBA interest rate decision concept. Images: Getty
The Reserve Bank of Australia has delivered its interest rate decision for February 2020. Images: Getty

The Reserve Bank of Australia (RBA) has left the official interest rate on hold in its first decision of the year amid growing coronavirus fears.

The RBA board delivered the decision to keep interest rates at the record low 0.75 per cent on Tuesday, following another strong month for the Australian property market and a small retail bump from Christmas spending.

The decision follows three interest rate cut decisions in 2019, with the RBA pulling the trigger in October, June and July.

However, stronger jobs figures and a 0.9 per cent boost to national dwelling values in January have seen the RBA hold rates in February 2020.

Pictured: Chart showing Australian home price growth in January 2020. Image: CoreLogic
Image: CoreLogic

Tuesday’s decision comes as no surprise to the majority of economists on’s RBA interest rate panel, with 87 per cent predicting the central bank would keep rates on hold.

“Better than expected labour market data should keep the Reserve Bank Board from cutting the cash rate in its first meeting of the year,” Mortgage Choice’s Susan Mitchell said.

“December 2019 Labour Force data from the Australian Bureau of Statistics revealed that the unemployment rate fell to 5.1 per cent (seasonally adjusted) from November. That being said, we would need to see consistent progress towards an unemployment rate of 4.5 per cent in order to see an improvement in wages and inflation.”

Macquarie University’s Jeffrey Sheen also predicted the bank would keep rates on hold in February, but that the coronavirus threat and bushfire damage could force the bank to cut rates to 0.5 per cent in March.

Coronavirus implications

Pictured: Woman wears mask to prevent coronavirus in busy Hong Kong street. (AP Photo/Achmad Ibrahim)

CoreLogic head of research Tim Lawless said the decision was unsurprising given the current economy.

“The hold decision was generally expected, especially considering the increased uncertainty brought about by the extent of bushfires domestically as well as the unfolding implications associated with the coronavirus outbreak.”

AMP Capital chief economist Shane Oliver also noted the impact of the coronavirus on the economy.

“With the economy a long way from the RBA’s full employment and inflation objectives, the bushfires likely to knock growth in the short term and the China coronavirus posing a new threat to global growth and tourist arrivals the RBA should be cutting rates at its February meeting,” Oliver said.

However, he added, the hold verdict was expected given the decline in headline unemployment in December.

According to Bloomberg, the respiratory illness could trigger a US$160 billion (AU$239 billion) global economic loss.

Treasurer Josh Frydenberg has also said the virus has the ability to hit the Australian economy.

"What we do know is that these events outside our control are going to have a significant impact on the Australian economy," he said.

Economy remains stable amid coronavirus ‘uncertainty’: Governor Philip Lowe

RBA Governor Philip Lowe said the global economic outlook remains “reasonable” although two sources of uncertainty remain: the US-China trade dispute and the coronavirus, which has so far killed hundreds.

He said that while it is too soon to say how long the financial impact will persist, it is having a “significant effect on the Chinese economy at present”.

“The central scenario is for the Australian economy to grow by around 2¾ per cent this year and 3 per cent next year, which would be a step up from the growth rates over the past two years. In the short term, the bushfires and the coronavirus outbreak will temporarily weigh on domestic growth.”

Full statement:

At its meeting today, the Board decided to leave the cash rate unchanged at 0.75 per cent.

The outlook for the global economy remains reasonable. There have been signs that the slowdown in global growth that started in 2018 is coming to an end. Global growth is expected to be a little stronger this year and next than it was last year and inflation remains low almost everywhere. One continuing source of uncertainty, despite recent progress, is the trade and technology dispute between the US and China, which has affected international trade flows and investment. Another source of uncertainty is the coronavirus, which is having a significant effect on the Chinese economy at present. It is too early to determine how long-lasting the impact will be.

Interest rates are very low around the world and a number of central banks eased monetary policy over the second half of last year. There is an expectation of a little further monetary easing in some economies. Long-term government bond yields are around record lows in many countries, including Australia. Borrowing rates for both businesses and households are at historically low levels. The Australian dollar is around its lowest level over recent times.

The central scenario is for the Australian economy to grow by around 2¾ per cent this year and 3 per cent next year, which would be a step up from the growth rates over the past two years. In the short term, the bushfires and the coronavirus outbreak will temporarily weigh on domestic growth. The household sector has been adjusting to a protracted period of slow wages growth and, last year, to a decline in housing prices, with the result that consumption has been quite weak. Following this period of balance-sheet adjustment, consumption growth is expected to pick up gradually. The overall outlook is also being supported by the low level of interest rates, recent tax refunds, ongoing spending on infrastructure, a brighter outlook for the resources sector and, later this year, an expected recovery in residential construction.

The unemployment rate declined in December to 5.1 per cent. It is expected to remain around this level for some time, before gradually declining to a little below 5 per cent in 2021. Wages growth is subdued and is expected to remain at around its current rate for some time yet. A further gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3 per cent target range. Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

Inflation remains low and stable. Over 2019, CPI inflation was 1.8 per cent and underlying inflation was a little lower than this. The central scenario is for CPI inflation to be around 2 per cent in the near term and to fluctuate around that rate over the next couple of years. In underlying terms, inflation is expected to increase gradually to 2 per cent over the next couple of years.

There are continuing signs of a pick-up in established housing markets. This is especially so in Sydney and Melbourne, but prices in some other markets have also increased. Mortgage loan commitments have also picked up, although demand for credit by investors remains subdued. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality. Credit conditions for small and medium-sized businesses remain tight.

The easing of monetary policy last year is supporting employment and income growth in Australia and a return of inflation to the medium-term target range. The lower cash rate has put downward pressure on the exchange rate, which is supporting activity across a range of industries. 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. Progress is expected towards the inflation target and towards full employment, but that progress is expected to remain gradual.

With interest rates having already been reduced to a very low level and recognising the long and variable lags in the transmission of monetary policy, the Board decided to hold the cash rate steady at this meeting. Due to both global and domestic factors, it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board will continue to monitor developments carefully, including in the labour market. It remains prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.

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