Preview: RBA February meeting
The Reserve Bank Board gathers in Sydney today for its first policy meeting of 2020, with the decision statement from Governor Philip Lowe to be published at 2:30PM (AEDT). After cutting the cash rate on 3 occasions last year to support employment and income growth and in response to headwinds offshore, the Board ended 2019 very much in wait-and-see mode and this was reflected in December's meeting minutes that outlined its summer recess would allow it take stock ahead of an eventual reassessment of its economic outlook in February, coinciding with the release of its updated forecasts.
In the event, the inter-meeting period has proven to be a turbulent time. A key risk the Bank was confronted with throughout 2019 was heightened uncertainty emanating from trade and geopolitical developments, though these headwinds appeared to be easing as the US and China formalised a partial trade deal and the likelihood of a hard Brexit faded. However, working in the other direction, Australia's bushfires intensified over the Christmas/new year period, and more recently the outbreak of the coronavirus in China has emerged as a risk that has the potential to derail a stabilisation in the global economy from its slowdown of the past 18 months. With the associated impacts on activity still very unclear, the most likely course of action would be for the Board to remain in wait-and-see mode, continue to describe the risks around its outlook as being "tilted to the downside" and reiterate that it has the ability to cut rates further if ultimately required. Tomorrow's address by Governor Lowe to the National Press Club (titled: 'The Year Ahead'), as well as Friday's quarterly Statement on Monetary Policy and parliamentary testimony, should provide much greater detail on how the Bank now assess the outlook and the balance of risks than today's decision statement.
Since its previous meeting, the Board has received a raft of data updates, though the labour market data and Q4's inflation update have been of most importance. On the labour market, when the Board last met the unemployment rate stood at 5.3% but it is now at a 9-month low of 5.1% following much stronger-than-anticipated gains in employment in November (see here) and December (see here). Meanwhile, the Bank's preferred trimmed mean measure of inflation came in at 1.6% through the year to Q4 (see here) and this was in line with its expectations. The Board will have also noticed that conditions in the established housing market have continued to improve into the new year, which it has previously identified as a factor supporting the growth outlook, though the bushfires may have tempered its short-term expectations somewhat, with tourism and retail trade most likely to have been affected.
Given the ongoing uncertainty around the outlook mixed with positive signals from the labour market, expect the Board to keep the cash rate on hold at 0.75% at today's meeting. For reference, no change in policy is the call from 22 of 25 economists surveyed by Bloomberg Australia, while financial markets are pricing in around a 1 in 4 chance of a 25 basis point rate cut being announced at 2:30PM.
