MNI INSIGHT: Easing Still On RBA Agenda Despite November Pause

By Lachlan Colquhoun

     SYDNEY(MNI) - The Reserve Bank of Australia is confident the economy is

improving, but any recovery could be slow and uneven and further easing remains

a strong likelihood, despite concerns over the impact on both confidence and

savers, MNI understands.

     The central bank left rates unchanged at its November meeting, despite "a

clear case" for a further 25bps cut, but there is an expectation that more

policy action will be required, either in the form of further rate cuts or other

measures, the likeliest being the purchase of Government bonds to lower "risk

free" interest rates.

     MNI's understanding is that some RBA Board members believe the Bank is

running out of ammunition and has only one or two more cuts left before

unconventional policy will be required.

     With just one more meeting scheduled for this year, a fourth cut before

Christmas is unlikely, but the Bank can be expected to review its position very

closely when it holds the first 2020 meeting in February.

     More detail could come in a keynote speech from Reserve Bank Governor

Philip Lowe on Nov 26, when he is due to speak in Sydney on "unconventional

monetary policy".

     --CLOSE CALL

     The November decision was close, but after cutting three times in the last

six months there was a view that a fourth cut in such a short space of time

could undermine confidence in the economy instead of boosting consumer demand.

     The result was an agreement to monitor the impact of the existing cuts to

see if the RBA's view of a "gentle" turning point in the economy is justified by

data going forward, particularly with regards to consumption, MNI understands.

     While policy has been successfully transmitted to asset prices, the

exchange rate and lending rates it has had little impact on consumption.

Households remain highly indebted, and extra funds from lower mortgages, or even

government tax cuts, are being used to pay down debt rather than spend in the

shops.

     Australia is about to enter the Christmas and New Year extended holiday

period, traditionally the best time of the year for retail, and industry

research suggests 2019 Christmas spending will be 2.7% higher than in 2018.

However, the biggest leap will be in online sales, which will feed through less

strongly to employment and wages.

     A second reason given for holding rates in November was the impact on

savers, who are now receiving barely 1% interest on their deposits. But while

this was noted in the meeting's minutes, the consideration given to savers is

likely to be only temporary if economic conditions continue to soften.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Sydney Bureau; +61 405322399; email: lachlan.colquhoun.ext@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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