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RBA On Hold as Nightmare Scenario of China Slowdown Emerges

Monday 3rd February 2020

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Australia is set to keep interest rates unchanged Tuesday as policy makers keep searching for signs that prior stimulus is encouraging households to spend. Hovering over the meeting is the specter of a viral-induced slowdown in China.

Governor Philip Lowe will keep the cash rate at 0.75% at the Reserve Bank’s first meeting of the year, according to 22 of 25 economists, with markets pricing similarly. The turnaround -- the majority began the year forecasting a February easing -- was driven by a fall in unemployment in the final two months of 2019.

“The economic data has generally come in on the stronger side over recent months,” said Kristina Clifton, a senior economist at Commonwealth Bank of Australia. “But the virus has the potential to impact on economic growth as consumers spend less, business and consumer confidence drops and tourists and people traveling for business delay their plans.”

A complete shutdown of Chinese tourism and student travel for a year would cut Australian GDP by almost 1 percentage point, “with significant additional multiplier effects,” according to Westpac Banking Corp.

The Australian tourism industry is already dealing with a demand shock following the wild fires that drove cancellations from abroad amid images of major cities choking on smoke, Australians fleeing their homes and fallen native animals.

Lowe cut interest rates three times between June and October to shore up consumer spending amid weak wages growth and elevated debt. The economic data in the past month has exceeded expectations.

Traditionally, the bank looks through one-off shocks, like bushfires and cyclones, taking the view that the subsequent reconstruction drives a comparative rebound. It will be on a watching brief with the virus.

Lowe will be questioned on the disasters when he addresses the National Press Club Wednesday in a speech titled “The Year Ahead.”

On Friday he, Deputy Governor Guy Debelle and other senior officials will appear in Canberra for the RBA’s semi-annual parliamentary testimony. Concurrently, the RBA releases its Statement on Monetary Policy that includes updated forecasts for economic growth, inflation and unemployment. It’s expected that near-term GDP growth projections will be lowered.

One area where the RBA’s easing has impacted quickly is housing: Sydney and Melbourne are leading the rebound, with data Monday showing prices climbed 1.1% and 1.2% respectively in January.

The labor market has also stood strong, with unemployment falling to 5.1% in December from 5.3% in October. Data Monday showed job advertisements jumped 3.8% in January.

Both markets and economists see little prospect of the RBA easing before April, giving policy makers a chance to assess fourth-quarter GDP.

(Bloomberg)



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