Regular readers will be aware of the elevated importance that global developments have taken on in the RBA's recent policymaking deliberations. The unusual moves taken by the Federal Reserve, European Central Bank, Bank of Japan and Bank of England over the past few days, with each signaling a willingness to act as required, will have been noted by the Board. Broadly, global central banks have been in wait-and-see mode over recent months while they have been gauging the impact of 2019's policy easing. There had been signs this policy easing was gaining traction, and with US-China trade tensions having ratcheted down notably, central banks generally saw the fundamentals were in place to support a recovery in the global economy in 2020. Of course, that outlook is now at risk due to the coronavirus outbreak, with the impact to be accentuated if financial conditions are left to tighten and inflation expectations fall. Thus, with a global shift to easier policy stances expected to come through, the conclusion of the Board will be on the lines of a point made by Governor Lowe in a speech last year;
"We live in an interconnected world, which means that we cannot completely insulate ourselves from long-lasting shifts in global interest rates. Our floating exchange rate gives us a degree of monetary independence, but we can't ignore structural shifts in global interest rates. If we did seek to ignore these shifts, our exchange rate would appreciate, which, in the current environment, would be unhelpful in terms of achieving both the inflation target and full employment"
Domestic factors are key as well, highlighted by the Board's decision at the February meeting to hold the cash rate steady on the basis that the upside from lower rates through faster progress towards its employment and inflation objectives was offset by the associated risks posed to financial stability. A few days after that meeting, Governor Lowe outlined at the Bank's semi-annual testimony to the House of Representatives Standing Committee on Economics that the; "nature of this balance between benefits and risks can change over time and it is dependent upon the state of the economy" before going on to say; "If the unemployment rate were to be moving materially in the wrong direction and there was no further progress being made towards the inflation target, the balance of arguments would tilt towards a further easing of monetary policy".
Recall that January's Labour Force Survey showed a rise in the unemployment rate from 5.1% to 5.3% and the underemployment rate lifted from 8.3% to 8.6%. The persistence of spare capacity in the labour market contributed to another subdued wages growth outcome in Q4 (0.5%qtr and 2.2%yr). Given the soft nature of these labour market data, the Board will have no tolerance to a situation that presents further risk to progress in meeting its employment and inflation objectives. That situation would be holding rates steady amid an expected and likely broad-based easing from other central banks, risking an upward rise in the exchange rate. Thus, expect the RBA to move in line with market pricing and cut the cash rate by 25 basis points to 0.5% today.
