Kathryn Lee - 4 Feb, 2020

Increased Employment Holds Back RBA Rate Cut

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Despite predictions that the Reserve Bank of Australia (RBA) would choose to ease monetary policy at its first meeting of 2020, today the Reserve Bank has decided to leave the official cash rate unchanged.

After a two-month break speculation between economists was rife, with most agreeing we would see a definite cut. Instead, the RBA decided to hold at 0.75% where the rate has sat since its record-breaking drop in October last year.

A Rise in Employment

In its December minutes the RBA alluded to a cut being likely, stating that it would depend on February’s “economic conditions.”

However, come February economic conditions have picked up, and with the recent growth in employment, the RBA has held fire on cuts – at least for the moment.

Recently, the Australian Bureau of Statistics (ABS) released figures detailing that over December the unemployment rate fell to 5.1%, an improvement on November’s 5.2%.

Of the figures, men’s unemployment stayed constant, sitting at 5.0%. In contrast, women’s unemployment fell 0.2 pts, dropping to 5.5%.

Impacted by the release of the figures, in two days the ASX 30 Day Interbank Cash Rate Futures changed its prediction from a 58% chance that the cash rate would change to just 19%.

Future cuts in sight

February’s hold has offered some relief to savers and retirees with their nest eggs sitting in savings accounts, however, this stalemate may be short-lived.

Westpac Chief Economist, Bill Evans, is predicting we will see our next lot of cuts in April, when he says the cash rate will fall to just 0.5%.

He believes this will be followed by a final cut to just 25 basis points in August.

After this, he expects the RBA will begin quantitative easing.

“…some time after reaching the 0.25% lower bound the RBA will move to a modest form of quantitative easing entailing a $2.5 billion monthly government bond purchase program,” he said.

What is Quantitative Easing (QE)?

Effectively a form of ‘printing money’, QE would see the reserve bank buy bonds in order to inject an influx of money into the economy.

Banks pull rate trigger despite hold

Despite the two-month break, ahead of today’s hold it would appear some banks pulled an early trigger, with many dropping their home loan rates below 3%.

According to Canstar Financial Services Executive Steve Mickenbecker, rather than being about the RBA this is reflective of the “incredibly competitive” nature of our current mortgage market.

“Rates are falling even though the Reserve Bank hasn’t met for the best part of two months, so the market’s very competitive and everyone wants to gain market share,” he said.

Words by Kathryn Lee

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