Australia’s central bank is now more likely than not to cut official interest rates next month, according to financial markets. The shift in outlook reflects increased concern that devastating bushfires across the country and increased geopolitical tensions in the Middle East will curtail economic activity in early 2020.
According to Australian interbank futures, the implied probability of the Reserve Bank of Australia (RBA) cutting rates by 25 basis points on February 4 rose to as high as 65 per cent on Wednesday following news of an Iranian missile attack on bases hosting US troops in Iraq, a stark turnaround from late December when the chances of a February rate cut stood at just 40 per cent.
As opposed to wavering market pricing, 18 of 22 economists polled by Bloomberg in early December forecast the RBA would cut Australia’s cash rate to 0.5 per cent in February.
While heightened tensions in the Middle East have been one factor behind the repricing of rate cut expectations, strategists believe the market reaction largely reflects growing unease that the bushfires ravaging many parts of the country will weigh on the broader economy, especially given the likelihood of further disruption as hot and dry weather conditions are expected to persist in the months ahead.
“The risk of there being broader macroeconomic spillovers this season are high given the scale of the fires,” said Katrina Ell, economist at Moody’s Analytics.
“For comparison, the Black Saturday fires in Victoria in 2009 destroyed 450,000 hectares of land and cost an estimated $4.4 billion, the current blazes have burnt 6.3 million hectares of land.”
Ms Ell said the scale of the fires will have both direct and indirect negative economic impacts, placing additional pressure on the central bank to cut Australia’s cash rate to fresh record lows.
“Odds were already high that the RBA would cut interest rates at its next meeting. The fires increase those odds,” she said.
While official building approvals and job vacancy data for November released on Wednesday both topped market expectations, hinting the economy was starting to strengthen following prior RBA moves and income tax cuts, recent indicators for the Christmas and New Year period suggest the rebound may prove to be short-lived.
ANZ Bank’s consumer sentiment index plunged to a fresh four-year low in early January, weighed down by steep falls in confidence, especially towards the longer-term economic outloook.
Separately, job advertisements measured by ANZ Bank fell 6.7 per cent in December, the second-largest monthly decline since 2009.
Activity across Australia’s construction sector also dropped at its fastest pace since May 2013 in December, according to the Ai Group’s Performance of Construction Index, weighed down by acute weakness in the apartment, commercial and engineering sectors.
Analysis from the Commonwealth Bank also cast a shadow over retail spending trends, with the value of credit card transactions processed through its platforms declining 1.2 per cent between November and early January compared to the same period a year earlier.
“The Christmas trading period looks to have been slightly disappointing,” Commonwealth Bank senior economist Belinda Allen said.
Source: Thanks smh.com