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Will the RBA cut rates again

Posted on 18 February 2019

A weakening in a range of economic indicators and the Reserve Bank’s own acknowledgement of more downside risks may see the RBA cut the cash rate later this year and possibly even again early next year.

  • The National Australia Bank’s Index of business conditions slumped 9 points in December to a + 2 reading.  While that’s close to the long-run average, the speed of the decline is jarring and was broad based across sectors.
  • Home build approvals dropped sharply in both November and December.  While a downtrend has been in place for some time, the speed of decline has accelerated of late.
  • Retail sales were flat in both the September and December quarter.  Retail sales volumes have enjoyed a saw tooth pattern in recent years – one quarter of weakness has been followed by a quarter of strength.  Yet sales were weak in the last two quarters.
  • ANZ job advertisements declined in both December and January and appear to be finally “rolling over”.  Job ads are not usually too volatile, so recent weakness likely indicates a shift in trend to a slower pace of hiring.

Probably the best news is that the unemployment rate is still low at only 5%.  But this is a lagging indicator to a degree, however the recent weakness in building approvals suggests there may be upward pressure on the unemployment rate in the months to come.

The housing sector remains a key swing variable for the economy – both through the “wealth effect” of weaker property prices on consumer spending, but also more directly through reduced employment in the housing construction sector.

Although Sydney and Melbourne house prices have already declined notably, they still remain expensive based on long-run affordability measures.  The absence of foreign buyers and proposed changes to negative gearing and capital gains tax laws – should the Labor Party win the next Federal election – are likely to continue to weigh on the sector.  As is usual, the upcoming Federal election campaign could also undermine business and consumer sentiment at a vulnerable time, especially as the Morrison Government is likely to wage a scare campaign over the threat to the economy posed by Labor.

Globally, while the US economy continues to post good economic growth, conditions in Europe and China especially have eased.  The lingering risk of a US-China trade war persists.

Commentary from the RBA last week suggests it now sees economic risks as more evenly balanced.  They have even dropped reference to the next move in rates likely being up, however there are many that think any move is more likely to be down.

Given that interest rates are already quite low and further declines might have only a muted effect on the economy, there is an obvious reluctance to cut further.  That said, should the unemployment rate begin to head higher, and given the still quite low rate of local inflation, the RBA may feel the need to respond by lowering interest rates.

Subject to what else happens in the economy, this should be a positive for interest-rate sensitive sectors of the market and companies with high offshore earnings exposure – given the AUD could also weaken.

Vue Financial

The author is an employee of Vue Financial Pty Ltd, Authorised Representative of Count Financial Limited, AFSL 227232.

Important information:

The information in this article is provided for illustrative purposes only and does not take into consideration your personal circumstances. You are encouraged to seek financial advice suitable to your circumstances to avoid a decision that is not appropriate. Any reference to your actual circumstances is coincidental. Count Financial Limited and its representatives receive fees and brokerage from the provision of financial advice or placement of financial products.

 

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