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Mark O' Donnell
Research Analyst
May 4, 2020

RBA's Decision: What to expect?

RBA decision: What to expect?

"RBA would hold the cash rate steady at 0.25%, " analysts at Wespact predict. 

Is there a possibility of a rate cut?

What are we to expect with RBA’s decision today? On the back of two rate cuts from 75 to 25 basis points, the focus remains to be on the outcome of the Coronavirus. Australia’s current figures stand at 6,825 confirmed cases with 95 deaths, an implied fatality rate of 1.39%, one of the lowest in the world. The real test, not just for Australia, but for the majority of countries who have had strict lockdown restrictions is following weeks after lockdown is lifted. A possibility of a second wave may force governments to implement stricter lockdown procedures, all but destroying short term economic recovery. This may spur the RBA to cut rates even further or increase their daily purchases in government bonds. 

However, there are tentative signs which point to the RBA leaving rates as is. Firstly, they have reduced their daily purchases in Australian Government Bonds from $4-5 Billion a day an average of $750 Million. This may imply that they are giving themselves some breathing room and firepower just in case the Coronavirus outlook gets worse once businesses return to normal, stating that “If conditions warrant it, we will return to daily bond purchases.” A similar rationale could be used to predict whether or not they cut rates later today. 

The immediate due to the Coronavirus is predicted to be around $50 Billion AUD, seeing GDP plunge 10% in the June quarter according to Treasurer Josh Frydenberg.

RBA's Interest rate against Unemployment Rate

The Reserve Bank of Australia has a mandate of achieving full employment, ensuring the stability of the currency and the economic prosperity of the people of Australia. Philip Lowe, Governor of the Reserve Bank of Australia, stated that he was “confident that our economy”; however, he further emphasized that the “unemployment rate will remain above 6%” over the next couple of years. He also cautioned against “returning to business as usual” as it would “cast a shadow” over the Australian Economy. This suggests a prolonged period of low rates until they are on track to achieve their full employment target of 4.5% again.

Potential upside for the AUD?

We should expect some volatility around the time of the RBA’s decision. As analysts forecast no rate changes, all eyes are on the RBA’s forecast for the Economy. A better than expected forecast may push the AUD to the upside, on the back of geopolitics between the United States and China pushing the AUD down, which Anish Lal explained in an excellent video here.  

 An abysmal US Retail Sales figure of -8.7% for March, all eyes are on the release of Q1’s Retail Sales figure for Australia, as it may give some insight on the potential damage the mandatory closures of retail stores have been.

 Talks to reopen borders between Australia and New Zealand

With New Zealand reporting an unprecedented zero new cases on Monday alongside Australia having one of the lowest fatality rates, talks between both governments on reopening borders between countries have started. This may help boost the shattered tourism industry in New Zealand, while slowly spurring demand in both countries and giving some slight relief, if any, to airlines. But Prime Minister Jacinda Ardern warned that there would be much work required to make a “Trans- Tasman bubble” safe and hinted that would not be such a bubble in the shorter term.  

 News of the bubble being implemented would bring significant tailwinds for both the NZD and the AUD. If all goes to plan and the coronavirus outlook after the bubble has been implemented remains stable, the chances of the RBA's decision of leaving rates as-is will drop significantly.  

Phliip Van Den Berg, an analyst here at Blackbull markets has some excellent technical analysis on the AUD/CAD pair in light of the RBA’s decision later today. You can watch the video here.

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