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Reserve Bank of Australia may cut cash rate in 2019 to support economic activity

The Reserve Bank of Australia has been expected for a long time to stand pat in 2019 and 2020; however, the profusion of downside risks in the global and domestic economy signifies a shift in this view, noted St George Economics in a research report.

The global economic risks shifted to the downside at the end of 2018 and those risks have increased at the start of 2019. These risks include a U.S. government shutdown, Brexit uncertainty, Italy entering recession in the fourth quarter of 2018, the stalling of German economy, ongoing U.S.-China trade tensions and slower growth likely in China in the year ahead.

At the beginning of 2019 nearly every economic data release in Australia has been subdued or below expectation except employment. Employment in Australia continues to be strong but it also lags economic activity. Possibly the biggest worries have been the rapid downturn of housing in Sydney and Melbourne and a sharp decline in business conditions that imply businesses might be feeling more fragile about the outlook.

Reports of subdued sales volumes and pre-sales activity imply that there is more softness to come. The downturn in housing is spreading as well. Even if some cities like Canberra, Adelaide and Hobart are arguably still recording growth in dwelling prices, there are signs of a deceleration in these markets as well.

There is a close connection between dwelling prices and consumer spending. This implies that consumer spending might grow only modestly in 2019, said St George Economics. The softness of retail sales by the end of 2018 implies that the weakness in housing might already be negatively affecting consumer spending.

Pick up in wage growth might be the key to lifting inflation into the RBA’s 2 percent to three percent per annum target band. Underlying inflation has been below the RBA’s target band for three years and the central bank’s latest projections is that the underlying inflation will take much longer to reach the target band. Nevertheless, given the weaker condition and the risks to the outlook, the Reserve Bank of Australia might possibly need to lower the cash rate to give some support to economic activity and encourage inflationary pressures, stated St. George Economics.

RBA rhetoric continues to be hopeful in spite of acknowledging that the risks around a cash rate move are now “evenly balanced” whereas previously they indicated it was more likely that the next move would be up.

“Given this optimistic stance and as the RBA has put employment in the spotlight, which is a lagging indicator, it might take some time for the RBA to start cutting rates, in our opinion. We expect the first rate cut in August, followed by another later this year”, added St. George Economics.

At 19:00 GMT the FxWirePro's Hourly Strength Index of Australian Dollar was slightly bullish at -71.4412, while the FxWirePro's Hourly Strength Index of US Dollar was neutral at -20.2274 more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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