Coronavirus won’t change RBA’s mind about rates

Coronavirus won't change RBA's mind about rates

Economic data released over the past two weeks has radically altered rate expectations, and top economists are pushing out their forecasts for another cut to April at the earliest.

The revised timing on rate cuts follows a better-than-expected unemployment rate of 5.1 per cent in December and a firm reading on consumer price inflation, with trimmed mean inflation – the RBA’s preferred measure – holding steady at 0.4 per cent.

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However, alarm is growing over the spread of the deadly coronavirus given the close economic links between Australia and China.

With infections now topping 8000 in China and the death toll rising, the World Health Organisation has declared the outbreak an international emergency.

“The only benchmark we have is SARS in 2003,” said Commonwealth Bank chief economist Michael Blythe, speaking about central bank reaction to disease outbreaks.

“The RBA talked about that but they didn’t change the cash rate. As long as they view [the coronavirus] as a short, sharp shock, they will look through it,” the chief economist said. “I imagine they will put it on their long list of concerns.”

And precedent does not support a rate cut in February, according to TD Securities interest rate strategist Prashant Newnaha. The central bank has cut at its first meeting of the year only twice before – in 2001 and 2015.

“With the run of positive domestic data into late 2019, the RBA now has time on its hands to assess the impact of prior easing,” the strategist said.

While interest rate futures markets are showing limited reaction to the news of the coronavirus, the Australian government 10-year bond yield has fallen back below 1 per cent and the Australian dollar has struggled for traction, trading at just over US67¢.

Mr Ticehurst said yields were following global counterparts lower while the Australian dollar had been trading very heavily.

That the Australian dollar hasn’t been able to rally on the better local economic data “is a sign of a deeper level of concern,” the strategist said.

Economists have estimated that the minimum cost to the Australian economy of the coronavirus outbreak could be up to 0.2 of a percentage point of GDP in the first quarter of this year, as Chinese tourist arrivals are expected to drop sharply.

The summer’s bushfires and continuing drought may also dampen economic growth at the start of the year. Growth was sluggish last year and inflation remains below the central bank’s target range.

Still, a lower Australian dollar would act as a shock absorber for the Australian economy,  Mr Ticehurst said. “That’s definitely helpful” for the RBA, he added.

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