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RBA on hold; to cut 2020 growth forecast from 2.8% to 2.6% - Westpac

In the view of Bill Evans, analyst at Westpac, the Reserve Bank of Australia (RBA) will remain on hold next week and push back a rate cut to April, in the wake of strong Australian jobs data.

Key Quotes:

“The Reserve Bank Board meets next week on February 4.

As discussed in our last weekly Westpac now expects the Reserve Bank to delay its next cut in the cash rate to April with the final cut to 0.25% occurring in August. Prior to the release of the surprisingly strong December employment report we had expected the cuts to be timed for February and June.

The RBA’s latest forecasts envisage the annual rate of the trimmed mean holding at 1.8% in 2020 and 1.9% in 2021. When the Bank releases its revised forecasts on February 7 we expect it will reaffirm that inflation outlook.

These are not the forecasts of a central bank (with a 2–3% inflation target range) that expects it has come to the end of its easing cycle.

Such a decision would only be appropriate if the Bank assessed that further easing in policy would be ineffectual or counterproductive.

We expect that the RBA will lower its 2020 growth forecast from 2.8% to 2.6% (rounded down to 2.5% in the main forecast table in the 'Economic Outlook' section). That compares with Westpac’s forecast of 2.1% (no coronavirus effect included) and will be justified by the weaker than expected momentum in 2019 (September quarter GDP was not available for the November forecast) plus some allowance for the bushfires/coronavirus.

However these latter effects will be considered transitory and the 'bold' forecast of 3.1% growth in 2021 will likely be retained.”

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