RBA likely to downgrade growth forecast but hold cash rate until further information, says ANZ Research

The Reserve Bank of Australia (RBA) is expected to wait for more information before moving further on monetary policy, which is similar to the approach it took in May and August of last year, but will likely lower its forecast for 2020 growth to 2.5 percent, according to the latest research report from ANZ Research.

The World Health Organisation has declared the coronavirus outbreak is an international health emergency. The immediate focus needs to be on those people directly affected by the virus. But attention is also turning to the potential economic impact.

Despite the downgrade, the RBA’s forecasts will still be consistent with a “gentle turn”, especially with the positive outlook for housing. Along with the recent strength in employment, the RBA is expected to refrain from cutting next week.

The forecasts will support the case for further monetary support in time, however.  The RBA’s various communications in the week ahead – starting with the monthly statement on Tuesday and ending with the Statement on Monetary Policy (SoMP) and Governor’s parliamentary testimony on Friday – will be against the backdrop of both Australia’s catastrophic bushfire season and the developing coronavirus outbreak, the report added.

With its cash rate close to the stated lower bound of 0.25 percent, the RBA is likely take the opportunity provided by strong employment data to keep the cash rate as is and wait for further information about the state of the domestic and global economies.

The SoMP (due on Friday February 7) will update the RBA’s forecasts. There will be competing influences, but a downgrade to the growth numbers and largely unchanged unemployment and inflation forecasts are expected.

"Together, these factors point to a downgrade in GDP growth forecasts over coming quarters. We expect the RBA to cut its growth forecasts by ¼ppt for Q4 2019, and Q2 and Q4 2020, taking through-the-year growth to 2 percent for 2019 and 2½ percent for 2020. Further out, we expect the GDP forecasts to sit at 3 percent as before," ANZ Research further commented in the report.