Rate cut still possible despite growth

The RBA says it's too early to say how global growth will be affected by the coronavirus outbreak.
The RBA says it's too early to say how global growth will be affected by the coronavirus outbreak.

A further interest rate cut could be on the cards as the Reserve Bank raises concerns about the impact of the coronavirus and a potential rise in the jobless rate.

Some positive signs in the global and Australian economies drove the decision to keep interest rates on hold, the Reserve Bank said in the minutes of its latest board meeting at which it left the cash rate unchanged at 0.75 per cent.

"Members discussed the coronavirus outbreak, noting that it was a new source of uncertainty for the global economy," the minutes read.

"With the situation still evolving, members observed that it was too early to determine the extent to which growth in China would be affected or the nature of the international spillovers."

However, the board stuck to the forecast of global growth accelerating in the second half of 2020.

The easing in trade tensions between the United States and China, and stimulus delivered by central banks had supported a "modest improvement in the growth outlook for a number of economies", the minutes said.

The unemployment rate was expected to remain in the five to 5.25 per cent range for some time before declining to around 4.75 per cent in 2021, as GDP and employment growth picks up.

Capital Economics senior economist Marcel Thieliant said it wouldn't take much for the RBA to cut rates further.

"If the unemployment rate rises yet again over the coming months as we are anticipating, the (RBA) will probably pull the trigger," he said.

"We stick to our forecast that the (RBA) will cut rates by 25 basis points in April and July."

NAB economist Kaixin Owyong noted the board had said it remained "prepared to ease ... if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time".

"The bank again noted the 'long and variable lags' of monetary policy, suggesting it is content with gradual progress, particularly as it balances faster progress against financial stability risks," she said.

"Governor (Philip) Lowe recently said that a material rise in unemployment and no progress on inflation could tip that balance and result in further rate cuts."

Following modest growth in the September quarter, the domestic economy is expected to be "weaker in the near term than had been forecast three months earlier" on the back of the bushfires and coronavirus outbreak.

"However, GDP growth was still expected to pick up over the forecast period, supported by accommodative monetary policy, a pick-up in mining investment, and recoveries in dwelling investment and consumption."

The bushfire recovery is expected to add to growth in the second half of 2020.

The central forecast for growth remained unchanged since November, at 2.75 per cent over 2020 and around three per cent over 2021.

Looking ahead, the RBA sees growth in consumption increasing gradually, sustained by moderate growth in household disposable income and the recovery in the housing market.

Growth in housing prices has picked up in most capital cities and parts of regional Australia over recent months, with prices increasing very strongly in Sydney and Melbourne.

Mining investment is considered to be going through a "trough" with non-mining investment also expected to be subdued in the near term, followed by a modest increase.

Wages growth is expected to be largely unchanged over the following couple of years "because mild upward pressure on growth in the wage price index would likely be offset by downward pressure from the increase in the superannuation guarantee from mid-2021", the RBA said.

In a positive sign for home buyers, the RBA said by around mid-2020 the average rate paid on outstanding variable-rate mortgages would have declined by around 75 basis points since May 2019.

Australian Associated Press