Resilience the keyword but interest rate cut the reality

The Reserve Bank board has returned from its summer break refreshed and optimistic.

While everyone’s been fretting about bushfires and the coronavirus, the discussion struck a “glass three-quarters full” tone at Martin Place in Sydney on Tuesday afternoon, where the board convened for the first time in 2020.

Not only did it leave the official interest rate on hold at 0.75 per cent — expected by most economists — but governor Philip Lowe delivered a chipper outlook: stronger growth, more jobs, a bit more inflation, more construction and higher house prices.

What’s not to like?

The dollar responded accordingly, flicking back above US67c after the 2.30pm announcement. It had been trading near its lowest level in a decade, amid falling iron ore prices and concern the coronavirus would choke the flow of Chinese tourists to dent economic growth.

Bushfires and the virus from Wuhan, which has wrought havoc with financial markets across the world in recent weeks, would have only a “temporary” impact on the domestic economy, Lowe said.

The RBA expects the economy to grow 2.75 per cent this year and a further 3 per cent in 2021, “which would be a step up from the growth rates over the past two years”.

In a word, the economy remains resilient.

“Progress is expected towards the inflation target and towards full employment, but that progress is expected to remain gradual,” Lowe said. Glacial might be more accurate.

To be fair, there’s been a warm patch of data of late: November retail sales were strong, the jobless rate has fallen two months in a row to 5.1 per cent, and house prices have continued their ascent amid signs the slowdown in credit growth has bottomed out.

Yet further rate cuts are likely in coming months to help an economy that’s fundamentally weak, given it’s dependent on high immigration, debt-fuelled increases in house prices and, of course, China, which is slowing down. Most economists expect coronavirus to drag China’s growth below 6 per cent this year for the first time in decades.

Moreover, central banks globally are in a cutting mood: 49 of them collectively cut official interest rates 71 times last year, according to analysis by Llewellyn Consulting.

If the RBA doesn’t follow suit, the currency will rise.

“A further gradual lift in wages growth would be a welcome development,” Lowe said, adding wages would be weak for “some time”.

That’s bad news for workers, and a subtle admission the RBA doesn’t expect to be back in its inflation target zone.

Expect lower rates soon.