Cash Rate Outlook: Vows and Declarations

The key points in this report are:

 

  • Unlike the winner of the Melbourne Cup – Vow and Declare – the Reserve Bank (RBA) did not surprise financial markets today. The RBA left the cash rate unchanged at 0.75%.
  • Today’s on-hold decision follows rate cuts of 25 basis points each at the June, July and October meetings. We continue to expect another rate cut in February 2020.
  • The RBA has maintained an easing bias, declaring in the final paragraph of its accompanying statement that it is prepared to ease monetary policy further if needed.
  • The statement also suggests the RBA has cut the growth forecast for 2019 to 2¼%, from 2½% previously. The RBA expects growth to swing to 3.0% in 2021. We do not anticipate growth to strengthen as much.
  • The RBA also hints at slightly softer inflation forecasts; in the statement it refers to expected inflation “to be close to 2 per cent in 2020 and 2021”.
  • The statement has only sprinkles of optimism, namely around housing prices and the global economy. However, caution has also stepped up with uncertainty around the drought and downturn in the housing construction cycle adding to their ongoing concerns. Uncertainty about the consumer-spending outlook continues to be singled out.
  • The RBA now expects wages growth to remain at around its current (subdued) rate for some time yet. It has also explicitly tied the inflation outlook to an improvement in wages growth.
  • We are left with a sense of an RBA waiting for now, but not for long. Another rate cut is likely by early next year. While the RBA did not mention unconventional policies in today’s statement, the spectre of these policies is looming larger.

 

Please see the attached report for more information.



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