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With respect to the Reserve Bank of Australia meeting this week, 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.

Key notes

  • Prior to the release of the surprisingly strong December employment report, we had expected the cuts to be timed for February and June.
  • The inflation report, which printed on January 29, confirmed that inflation remains ‘stuck’ well below the Board’s 2–3% target band with the trimmed mean (the key measure of underlying inflation used by the RBA) printing 0.43% for an annual rate of 1.6%.
  • The annual rate of increase of the trimmed means has been within a 1.5%–1.8% range for the past four years. TheRBA’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 assessedthat further easing in policy would be ineffectual or counterproductive.
  • However, in its December minutes, the Board made the case for the effectiveness of the monetary policy.“Members discussed the transmission to the economy of the interest rate reductions since the middle of the year.
  • They noted in particular that the available evidence suggested that more stimulatory monetary policy had been working through the usual channels of lower bond yields, depreciation of the exchange rate and lower interest rates on mortgages.
  • There had also been an effect on housing prices, increased housing turnover in the established market and some early signs of stabilisation in housing construction activity …… While members recognised the negative confidence effects for some parts of the community arising from lower interest rates, they judged that the impact of these effects was unlikely to outweigh the stimulus to the economy from lower interest rates”.