Will the RBA cut interest rates next week?

Niko Iliakis

Thursday 27 February 2020

The Reserve Bank’s next meeting is less than a week away, and the board will have a lot to mull over. In particular, the latest round of jobs data must have RBA Governor Philip Lowe reeling. After dropping to 5.1% in December, seasonally-adjusted unemployment shot back up to 5.3% in January.

The RBA has repeatedly said that unless that number drops to 4.5%, it’s unlikely we’ll see a lift in wages of the kind necessary to get the country spending again. 

On top of that, the threat of the coronavirus outbreak continues to loom over the economy. While stock markets seemed to be fairly blasé to begin with, they’ve since gone into a panic, with closures of Chinese borders expected to hit our tourism, education and agriculture sectors hard.

“All of the confidence that’s been supporting the astronomical climb in the stock market is evaporating, and fund managers are pulling investments out and putting them into safer places,” said Mozo’s banking expert Peter Marshall.

Why the jump in unemployment?

According to the ABS, 13,500 jobs were added in January — 32,700 part-time jobs disappeared while 46,200 full-time jobs were created. So why are we seeing a spike in unemployment?

The answer lies in the participation rate - the percentage of Australians who are currently in work or looking for it - which climbed up from 66% to 66.1%. Essentially, more Australians are searching for work but not enough jobs have been created to accommodate them.

The board will be dismayed to see the number of underemployed Australians has also swelled. The underutilisation rate - which measures the number of unemployed people plus those working less than they’d like to be - shot up to 13.9%, the highest it’s been since April 2018.

Would the board hold off until April?

It’s almost certain that we’ll see official interest rates drop to 0.50% in the coming months, especially if the coronavirus outbreak continues to roil global markets. But any decision to cut has to be balanced against the housing market, which has gotten out of control in recent months.

“There are too many risks present at the moment. I think that the RBA will definitely cut, it’s just a question of if they want to get ahead of the game or if they want to try to wait till April,” said Marshall.

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