Analysis: Money Market Underpricing Risk of Feb RBA Cash Rate Cut
- Published on
- 08 Jan 2020, 12:00 AM
By Sophia Rodrigues
Australia’s money market may be underpricing the risk of a cut in the Reserve Bank of Australia’s cash rate in February as decline in consumer and business sentiment due to the ongoing bushfires adds to the existing case for more monetary stimulus.
As of Wednesday morning, money market was pricing around 56% probability of a 25 basis points cut at the first board meeting of 2020, due on February 4. The current cash rate is 0.75%.
The RBA ended 2019 in a “wait and assess” mode but with a clear easing bias.
One of the reasons behind the RBA’s decision to wait and watch was the need to continue assessing how easy monetary policy was affecting the economy, including the impact of lower rate on consumer and business confidence which had declined in recent months.
This was despite the RBA recognizing that the negative confidence effects from lower interest rates was likely to be outweighed by the positive stimulus from lower rates.
Confidence has declined and data over the next few weeks is expected to show a further fall but the recent fall would be because of uncertainty amid the bushfires, not a direct reflection of view on the economy.
What this means is that the same factor --- decline in business and consumer sentiment --which contributed to the RBA’s pause could now be a key contributor to a likely rate cut decision next month.
The National Australia Bank’s monthly business survey for November, published in December, showed confidence dropped back to zero. The next survey is due later this month.
The most recent data on consumer confidence data published by the ANZ on Tuesday showed a 1.7% fall in the week to January 5 to the lowest level in over four years. ANZ said a drop in confidence at the start of the year is unusual and almost certainly reflects the impact of the catastropic bushfires over the weekend.
Australia is currently experiencing one of the most devastating bushfires in its history. According to current estimates around 16 million acres of land has burned so far, 28 people and 500 million wild animals have died, and over 1,600 homes have been destroyed. The fires are mainly concentrated in the states of New South Wales and Victoria.
The economic impact of the fires is hard to quantify because there is both direct impact on the communities affected and the indirect impact that could be felt through the nation via business and consumer sentiment.
Reports suggest the insurance bill has topped A$700 million but this is expected to increase significantly as fires continue and more damage is assessed. The federal government has announced funding of A$2 billion over the next two years, and pledged to provide more if required.
Economists estimate the impact on GDP would be limited because most of the fires are in areas that are not big contributors to the nation’s GDP. The immediate spending, including from the government, on containing the fires, helping communities and the recovery is expected to be a partial offset.
However, it is not the direct economic impact that would be of concern to the RBA. Indeed it is even likely that the recovery and rebuild would provide a boost to GDP in the medium and longer term.
The immediate worry would be fall in consumer and business confidence, and the RBA might have to take on the role of confidence-booster by lowering the cash rate and providing a positive stimulus.
--Contact: sophia@centralbankintel.com