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No rate cut for you - here's why -

Peter Switzer
8 May 2019

Normal people don’t do what I do, like read the Statement by Dr Philip Lowe, Governor of the RBA on his Board’s “Monetary Policy Decision”. Normal people will be reading about who’s going to get rubbed out for Saturday’s footie games for behaviour unbecoming, what Bill has promised for May 18 and how Scott coped with a disgraceful egging on the campaign trail.

But what banks are going to take off me for having the guts to borrow for wealth aspirations reasons is also important to me so I was keen to see what Dr Phil had decided.

Of course, being an economist I’m conflicted. As a consequence, I didn’t want a cut! Our economic story is mixed as I pointed out yesterday at https://www.switzer.com.au/the-experts/peter-switzer-expert/do-we-really-need-an-interest-rate-cut-today/, where I argued that we might not need a cut just yet.

I’ll explain why in a minute but for now let me dumb down what Dr Phil wanted to tell us if we bothered to read him after his Board’s decision to leave the cash rate at 1.5%.  

I’ll use italics for what Dr Phil shared with us, so here we go:

The big Australian picture

• The outlook for the global economy remains reasonable, although the risks are tilted to the downside. In most advanced economies, inflation remains subdued, unemployment rates are low and wages growth has picked up.

• Global financial conditions remain accommodative.

The financial story

 • Australian long-term bond yields are at historically low levels and short-term bank funding costs have declined further.

• Some lending rates have declined recently, although the average mortgage rate paid is unchanged.

• The Australian dollar is at the low end of its narrow range of recent times. 

What we think will happen

• The central scenario is for the Australian economy to grow by around 2¾ per cent in 2019 and 2020. This outlook is supported by increased investment in infrastructure and a pick-up in activity in the resources sector, partly in response to an increase in the prices of Australia’s exports. 

What we’re worrying about

• The main domestic uncertainty continues to be the outlook for household consumption, which is being affected by a protracted period of low-income growth and declining housing prices. Some pick-up in growth in household disposable income is expected and this should support consumption.

Love the jobs market

• The Australian labour market remains strong. There has been a significant increase in employment, the vacancy rate remains high and there are reports of skills shortages in some areas. 

Despite these positive developments, there has been little further progress in reducing unemployment over the past six months. The unemployment rate has been broadly steady at around 5 per cent over this time and is expected to remain around this level over the next year or so, before declining a little to 4¾ per cent in 2021. The strong employment growth over the past year or so has led to some pick-up in wages growth, which is a welcome development. Some further lift in wages growth is expected, although this is likely to be a gradual process.

Inflation genie gone missing

The inflation data for the March quarter was noticeably lower than expected and suggest subdued inflationary pressures across much of the economy. Over the year, inflation was 1.3 per cent and, in underlying terms, was 1.6 per cent.

Looking forward, inflation is expected to pick up, but to do so only gradually. The central scenario is for underlying inflation to be 1¾ per cent this year, 2 per cent in 2020 and a little higher after that. In headline terms, inflation is expected to be around 2 per cent this year, boosted by the recent increase in petrol prices.

The ‘do nothing’ decision

The Board judged that it was appropriate to hold the stance of policy unchanged at this meeting. In doing so, it recognised that there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target. Given this assessment, the Board will be paying close attention to developments in the labour market at its upcoming meetings. 

The two big take outs for me were that the RBA isn’t over-worried about house price falls; and it’s watching the job market. If unemployment starts to rise, I’d start tipping a rate cut.

Deep down I hope Dr Phil is on the money. I reckon he needs to see a Trump-China trade deal, a slowing down of falling house prices locally, improving economic growth in the US, Europe and China on top of a much better growing Oz economy. If he gets this, maybe helped by the promised tax cuts from both the Coalition and Labor, we might ‘just’ not see a rate cut at all over 2019.

However, if this beautiful set of numbers, which explain why we didn’t see a rate cut, that Dr Phil has dreamt about doesn’t show up, then we’ll see cuts ahead and a whole pile of unhelpful negative economic headlines.

Go Dr Phil!

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