The door remains open for further rate cuts

After three interest rate cuts this year, the RBA left rates on hold in November. But with the local economy still not where it needs to be, there is growing speculation that we'll see another rate cut in the coming months.

The door remains open for further rate cuts
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The latest minutes from the RBA, released on November 19, revealed the surprising revelation that members were ‘seriously considering’ a 25 basis point rate cut at the November board meeting.

At the time, the odds of a cut were sitting at 4%, so the probability was very low. Internally, however, it appears the decision was a lot closer than what the numbers were suggesting which changes the outlook for further interest rate cuts considerably.

The RBA and Governor Phillip Lowe, have made it very clear that they are targeting an unemployment rate that’s under 5% and more preferably under 4.5%. Their thinking is that strong employment will put upward pressure on wages and in-turn drag inflation back into their target band of 2-3%.

Last month’s jobless rate saw a slight improvement, with a fall from 5.3% to 5.2%. While only a small change, the hope and belief was that the tide is turning for the economy. The news clearly pleased Governor Lowe, who started making it known that the RBA was perhaps at the end of their cycle of easing.

This all abruptly changed as this month's jobs report showed no improvement in the unemployment rate and a large -19,000, contraction in the number of jobs created.

In light of this week’s minutes, it’s clear that the RBA still has some unfinished business and the odds of a further rate cut, now appear far higher than what they were only days ago. February 2020 has long been looked at as a strong possibility of another cut which could potentially see the official cash rate fall to a new record low of 0.5%.

Canstar financial expert and chief spokesperson, Steve Mickenbecker believes the RBA will continue to wait on data before making any decisions on further interest rate cuts.

“The RBA was clearly disappointed with the jobs data and it’s really saying that the 25bp of cuts just haven’t taken effect at this stage,” said Mr. Mickenbecker.

“I think the RBA, as they usually do, are waiting. There’s been a number of rate cuts, there’s been infrastructure spending which is being accelerated, so they’re likely saying, let’s just wait a while and take a closer look at more jobs data, before we move again."

“My view is that we’re not going to see any change in December, but February is looking like a real possibility.”

At the same time, the low interest rate environment is starting to fuel the housing market recovery with property prices in Sydney and Melbourne both rising more by more than 5% in the last three months according to CoreLogic. This would be a concern for the RBA according to Mr. Mickenbecker.

“Low rates do appear to be getting people back into the housing market. We’ve had high clearance rates at auction and rising prices, so it certainly appears the cuts started to take hold there, but the RBA would not like to see them run away again as they did in 2017.”

“Further cuts will likely encourage higher prices, which is a reason for them to hold if they can.”

Andrew Woodward from The Investor’s Way believes that while the decision to hold rates was likely, previous rate cuts haven’t been passed on in full.

“The two recent rate cuts are yet to fully be reflected in the market, with some banks' implementation dates of the second cut yet to be activated,” said Mr. Woodward.

“With this in mind and the usual global considerations, it was no surprise rates were kept on hold. The fears of global economic factors seemed to weigh heavily on the decision, in particular, the potential for continuing China and US trade wars.”

Mr. Woodward also feels that the most important factor for the RBA will be the state of the local economy.

“While it wasn’t necessarily front and centre of the decision, the fact is the Australian economy is still not growing at a rate that the RBA would prefer, creating some nervousness as to where we go from here.

"This week we have heard that the Government is bringing forward infrastructure expenditure to stimulate employment and wage growth. This is a clear sign that they are concerned about the stagnant nature of the economy, which would have been a factor for the RBA as well.”

“With rates already at record lows, there is only so much rates cuts can do. It now appears the Government has been scared into action.”

“The prospect still remains that there will need to be a further cut early next year, likely February.”

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