The RBA will stay on hold in February, using the recent improvement in the unemployment rate to buy time – suggesting the bank will continue to react to the accumulation of evidence very gradually. It is important to note that the framework for monetary policy still suggests that rates should be lower. Inflationary pressure remains weak and recent headwinds – particularly for consumption and business investment – are likely to persist. Notwithstanding the recent dip in the unemployment rate, a large degree of spare capacity remains in the labour market with little progress having been made over the last year in reducing unemployment. Nonetheless, unless the RBA wishes to move against market expectations, the February cut appears off the table. Consequently, we have moved the timing of the next cut to April followed by a second cut around mid-year. Beyond that the risk of a move to ‘unconventional’ policy in H2 2020 will depend critically on whether the labour market deteriorates more significantly than we forecast. By April, the RBA will have confirmation of another quarter of weak consumer spending with further evidence that interest rate and tax cuts to date have not done enough to boost spending. We will review our GDP forecasts over the next week or so as more information comes in on the indirect effects of the bushfires and coronavirus on activity and ultimately the labour market.

For further details, please see the NAB changes rate call – January 2020