Dr Brendan Rynne, KPMG Chief Economist, responds to today’s RBA rate decision
I believe the RBA was, on balance, correct to hold rates today – but it must have been a tough call. While the effect of the fires throws a caveat around any predictions, KPMG will stay with our belief that by the end of the year, Australian GDP will be growing by 2.3 percent compared to the current low point of 1.9 percent.
Even before the twin perils of coronavirus and bushfires are factored in, the Australian economy had been performing relatively poorly, compared with recent history. GDP data for 2019 Q3 was weak, with quarterly growth actually softening from 0.6 percent q/q in 2019 Q2 to 0.4 percent in 2019 Q3.
Domestic final demand remains extremely soft, with consumer spending flat as households sought to increase their savings rather than spending the rise they enjoyed in their household disposable income (due to tax cuts as opposed to wages growth). The collective effects of high household debt, low consumer confidence and a soft outlook for the labour market are dampening private spending. None of the inflation, unemployment and exchange rates are where the RBA would ideally like them.
As for the coronavirus and the bushfires, it is too early to tell with any degree of accuracy the size of the impact these events will have on the national economy – but it will clearly be negative in 2020 Q1. Lower consumption and reduced business activity and investment may to some degree be countered by higher government spending to ease the burdens of bushfires on the community – but the likelihood is the net effect will still be negative.
All of these factors gave the RBA good reason to continue with its downwards trajectory for the cash rate. I still believe there will be a cut by middle of the year.
But for now, the RBA was probably right to keep some of its limited powder dry. There is clearly a large degree of uncertainty about the twin effects of coronavirus and bushfires, so it was not unreasonable for the RBA to want to see more evidence before acting.
After all, a cut today would bring the cash rate within one more cut of entering into the 0.25 percent territory – the RBA’s self-assessed ‘lower bound’ – which is the rate nominated for potential adoption of quantitative easing. These are uncharted and potentially dangerous waters for Australia.
KPMG remains sceptical that quantitative easing will be implemented by the RBA – we believe it is more likely that this unconventional policy action will be avoided by the thinnest of margins. And I believe that a reluctance to get too close too early in the year to quantitative easing territory may have stayed the Bank’s hand.