Analysis: Lower AUD Means RBA Unlikely to Spring Rate Cut Surprise Tue

By Sophia Rodrigues

Anyone expecting the Reserve Bank of Australia to pull a surprise on Tuesday is likely to be disappointed because the fall in the Australian dollar since November means there is no pressing need for a cut now.

There is no denying there are several arguments in favor of a lower cash rate and there are equally strong arguments for an unchanged cash rate of 0.75%. But the one factor supportive of an on-hold decision is the lower exchange rate.

Since November when the RBA last published forecasts for the economy, the Australian dollar is down around 3% both versus the USD and on a trade-weighted basis. And if sustained, it can provide a lot of stimulus to the economy. Even more than what one or two cash rate cuts could do.

It is a well-known fact that the three cash rate cuts last year were mainly aimed at a lower exchange rate or in the least, to prevent an upward pressure.

HOUSING MARKET SENTIMENT, DWELLING APPROVALS IMPORTANT

Apart from the lower exchange rate, developments in the housing market, particularly sentiment, would be an important factor supporting steady cash rate because this would support upgrade in growth and inflation forecast, and offset downgrade in near-term forecast due to impact of bushfires and Coronavirus.

National Australia Bank’s residential property index for Q4, published last week, showed a rise in the index to a six-year high. For the first time since early-2018, sentiment was positive in all states, including a further lift in Western Australia which suggested it could be emerging from its long downturn.

The rise in housing market sentiment was also seen in Westpac-Malbourne Institute’s consumer sentiment survey for January which showed a strong lift in both house price expectations and “time to buy” index.

An improvement in housing sentiment has the potential to translate to increased housing market activity, and from there to growth in consumption.

Dwelling approvals data have also been better than expected in recent months, raising optimism that a gentle turning point may have reached.

“While the monthly profile for total approvals may be shaping into a sharper turning point the detail suggests the underlying cycle is turning more slowly. Either way, its likely to be a few more months before we get a clear read,” Westpac economist Matthew Hassan wrote in a note.

In November, one important risk discussed by the RBA was that dwelling investment could decline by more than its forecast and have implications for employment and profits in the constuction sector, and second-round impact on services and manufacturing sector. On the other hand, the RBA also discussed the possibility of stronger recovery in dwelling investment.

The RBA discussed how sustained strength in established housing price growth could boost consumption growth by more than expected.

It is likely that the new set of forecasts for the February Statement on Monetary Policy would incorporate the upside risks discussed in the November’s statement.

DOVISH BIAS TO STAY

While the RBA is unlikely to cut on Tuesday, the bias is likely to remain dovish given there are plenty to risks to the economy that the RBA may not be in a position to quantify now.

One such risk is trading partner growth, including the biggest trading partner China. The dovish bias would mainly reflect downside risk from this source.

--Contact: sophia@centralbankintel.com