First cash rate decision of 2019 to be announced

by Rebecca Pike05 Feb 2019

The Reserve Bank of Australia (RBA) will announce its first cash rate of 2019 today, a decision that comes at a time of uncertainty in the financial sector.

The rate has remained at 1.50% since August 2016, as the RBA aims to improve unemployment rates and reach target inflation.

While governor Philip Lowe has always said the next move for the cash rate will be an increase, although some say current conditions in the economy could be calling for a decrease.

Steve Mickenbecker, group executive of financial services at Canstar, said he does not expect a move today.

He acknowledged that while the country will still be looking at the Royal Commission instead of the RBA, the cash rate decision is still an important one. While the treasurer has committed to taking action on each of the recommendations, much of the action is only 'in part' after more consideration.

He added, “The RBA won't be moving rates this February, but that doesn't mean that the central banker lacks relevance. The context of the RBA decision and RBA's expectations for the economy will be one reference point to inform politicians on how they should proceed.

“There is a decision to make. Australia is facing a tough implementation or a soft touch, and what the Reserve Bank says in coming months about outlook for the economy should be one input to decision-making.

“The banks have already toughened up on credit. Any tougher and we are well and truly in credit crunch territory.

“If this comes as the economy and foreign investment in Australian property slows, the property price falls will cease to be a correction and will become a route. That would mean recession. Reforms are necessary but sometimes a deft touch is needed to avoid boom - bust mentality.”

The RBA’s shadow board at Australia National University has increased its probability of a rate cut in the next six months, from 6% to 11%. However, it still expects that today’s decision will be a hold, attaching a 56% probability to that outcome.

RBA Shadow Board chair Dr Timo Henckel said Australia's economy has softened slightly, with the growth rate dropping to 0.3% for the September quarter and inflation edging down to 1.8% in the December quarter.

"The Shadow Board continues to favour holding the cash rate constant, but the uncertainty surrounding its policy recommendation reflects the slight weakening of economic data,” he added.

In the longer term, the Shadow RBA placed a 60% probability on the need for a rate hike in six months, down eight percentage points from the previous round.

The probability that rates should remain at 1.5% jumped three points to 29%, while the probability of a required rate cut increased from 6% to 11%.