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Monday, December 2, 2019

Preview: RBA December meeting

The Reserve Bank of Australia (RBA) Board meets for its final policy meeting of 2019 in Sydney today, with the decision statement from Governor Philip Lowe due at 2:30PM AEDT. At today's meeting, the Board is expected to keep the cash rate unchanged at 0.75% as waits to assess the impact of the three earlier rate cuts it delivered in June, July and October.  



At the previous meeting in November, the minutes outlined that the Board considered there to be a case for announcing a 25 basis point rate cut, however; it made the decision to remain on hold on the basis that more time was needed to allow the earlier rate cuts to work their way through the economy before it could reach a complete assessment of conditions. This is a very similar tact to that recently taken by other major central banks offshore following an earlier easing in their monetary policy stances in 2019.  

Looking back over the inter-meeting period, the key developments have been;



  • From offshore: Following a third consecutive 25 basis point rate cut in October, the minutes from the US Federal Reserve's (Fed) meeting said that after this latest reduction, monetary policy would be "well calibrated" to support its constructive outlook for GDP growth, labour market conditions and inflation. Similarly, the account of the European Central Bank's (ECB) policy meeting in October confirmed the Governing Council was taking "wait and see" approach after delivering a package of stimulus measures at its previous meeting. The shift to more reactionary stances came as the US and China continued working towards finalising the phase one trade deal, risks of a no-deal Brexit diminished, and activity indicators globally pointed to a stabilisation of weakness in the manufacturing sector as services remained in a modest expansionary phase. In a similar vein, the second estimates of GDP growth in Q3 in the US and euro area were revised up to 2.1% annualised and 1.2% year-on-year respectively. However, both the Fed and ECB continued to assess the risks to the economic outlook as being "tilted to the downside". 


  • In Australia: The key focus for the Board domestically is on developments in the labour market. Here, the data that came to hand was soft. On net, employment fell by 19.0k in October against an expected 16.0k rise (see here). Despite the participation rate easing by 0.1ppt to 66.0%, the national unemployment rate lifted to 5.3% from 5.2% and the underutilisation and underemployment rates increased to 13.8% and 8.5% respectively to reverse declines achieved in the previous month. Meanwhile, Q3's Wage Price Index showed a 0.5% gain in the quarter, which saw the annual pace slow from 2.3% to 2.2% (see here). The Bank's most up-to-date assessment of the labour market was outlined by Deputy Governor Guy Debelle during a speech last week in Canberra. Key observations were that strong employment growth is being met with a rising supply of workers, due largely to structural forces associated with participation by females and older Australians, while there had been a prevalence of wages growth outcomes in the 2%pa range across the economy. Overall, indications were that labour market conditions need to be tighter to generate a faster pace of wages growth that is consistent with inflation being within the Bank's 2-3% target band. This underscores the Board's easing bias, with RBA Governor Lowe outlining at a speech last week that it is prepared to lower to cash rate down to 0.25% before it considers turning to unconventional policy in the form of quantitative easing. Meanwhile, housing market conditions remained on the improve; house prices lifted by 1.7% on a national basis in November according to CoreLogic, while owner-occupier housing finance approvals saw a sharp 3.6% rise in September (see here).  

While the soft domestic labour market data are likely to reaffirm to the Board that the case for a further easing in the cash rate could be made, expect there to be no change today. Instead, the more likely approach from the Board will be to wait on tomorrow's Q3 GDP data and reassess the overall situation next year at its February meeting. By then, it will hope to have a clearer insight into global developments and how the domestic economy has responded to interest rate cuts and tax relief. This approach would keep it in line with the wait-and-see stance taken by other central banks offshore, while still retaining an easing bias. For reference, markets are pricing in only around a 10% chance of a 25 basis point rate cut today.