Another Interest Rate Cut Looms

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Odds have shortened that RBA will cut their official interest rate to 0.5% at their March meeting next week.

Although last year having signalled its intention to continue to ease monetary policy this year, the RBA held off a further interest rate cut at its first meeting in February because of stronger housing markets.

“A further reduction in interest rates could also encourage additional borrowing at a time when there was already a strong upswing in the housing market,” the RBA minutes said.

But things have changed since then.

Recently labour market data has deteriorated with unemployment rising again and wages growth still low and stagnant.

The RBA has indicated that the labour market is the main game for monetary policy considerations.

It wants to lower the unemployment rate so wages rise, but the most recent figures show the equal highest jobless rate at 5.3% since May 2018.


Source: ABS

Also wages growth was at a record low with the public sector wages growth falling to just 2.2%.

Quaterly Change

Last year’s rate cuts seem to have had no impact on main economic factors of jobs and wages  – which are now moving in wrong direction for the RBA.

The Corona virus. Interest Only Lending Australia

Poor recent economic data has been exacerbated by rising concerns over the economic impact of the coronavirus.

Sustained shakeouts in local and overseas share markets are concrete signs of worries of the coronavirus as a pandemic.

This is clearly a developing story, but Australia banning travel from China, to stop the spread of this virus is already having an impact on our tourism and education industries, both significant sectors of our economy.

The coronavirus is creating a second wave of economic disruption in Australia. Whereas the first phase of economic disruption impacted sectors such as casinos, air travel and hotels, the new phase is disrupting supply chains, with many Chinese factories still closed.

A rate cut looms

The RBA is now more likely to make a pre-emptive strike by cutting rates to offset the impact of declines in tourism, students, lower demand for commodities and supply chain impediments.

A rate cut however will put downward pressure on an already sharply weaker Australian dollar which will work to lower living standards through higher import costs – particularly fuel.

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