MNI PREVIEW: RBA Cut Expectations Ease Despite Fires, Virus

By Lachlan Colquhoun

     SYDNEY(MNI) - Positive employment and inflation data have lowered

expectations the Reserve Bank of Australia will cut interest rates at its first

2020 meeting next Tuesday, but the RBA board must also factor in recent

bushfires and the still unquantifiable impact of the coronavirus epidemic on the

economy.

     Rates futures are pricing in only a 15% chance that the RBA will cut its

cash rate from the record low -0.75%, after unemployment fell to 5.1% and data

yesterday showed inflation increasing to an annual 1.8%. A Bloomberg survey of

economists however saw a majority backing a cut.

     December's unemployment rate only improved on the back of increased

part-time employment, with almost 30,000 summer jobs created in the retail

sector. Full-time employment fell by 300.

     While the inflation figure surprised investors, edging closer to the RBA's

2-3% target band, it was propelled by higher food prices from the ongoing

drought and increased taxation on tobacco products.

     The RBA will also be monitoring the economy's response to bushfires and

coronavirus. An unprecedented summer saw entire towns destroyed, along with

businesses and homes, and the usually vibrant holiday tourism industry suffered.

The coronavirus could also sap exports to China, Australia's largest trading

partner, as well as the inflow of the Chinese students and tourists whose

spending has become increasingly important.

     --DIMINISHED AMMUNITION

     If it does tilt towards easing, the RBA, with little monetary ammunition

left, may still need to consider whether it might be better to keep its powder

dry in case the need is greater later in the year.

     Last November, the Bank said that while there were strong arguments in

favour of another rate cut, there was a counterveiling view that any cut would

impact negatively on already fragile economic confidence.

     Even if the RBA does not cut next week, it will be Governor Philip Lowe's

first opportunity to comment on the fires and the epidemic, and give the Bank's

view on the 2020 outlook.

     In every communication over the last quarter of 2019 the Bank talked

optimistically of a "gentle" recovery and the eventual achievement of inflation

targets and full employment.

     If that language changes, more rate cuts are likely to be on the way, if

not next week, then in coming months.

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

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