RBA lifts the bar to further easing – TD Securities

The TD Securities Analysts highlight the main takeaways from Wednesday’s speech, titled 'The Year Ahead', delivered by the Reserve Bank of Australia (RBA) Governor Lowe.

Key Quotes:

“Moving away from growth: The RBA Governor reiterates the Bank's upbeat outlook and states the economy is passing through a gentle turning point. The additional information we received today following yesterday's Statement was 1) there are risks to lowering rates further; 2) the bushfire impact is likely to detract 0.2% pts each from Q4'19 and Q1'20 GDP and 3) the bar to easing has shifted away from growth, requiring the unemployment rate to head in the wrong direction AND inflation to head lower.

What does this mean? The RBA has been a reluctant cutter last year and today's speech reinforces that it is likely to be a reluctant cutter this year. We were surprised the Gov included Q4 GDP as being significantly impacted by bushfires – the bushfire impact was arguably the last 2 weeks of Dec, so the Q4 hit shouldn’t be significant, more an issue for Q1 in our view.

From this we imply the Gov is reluctant to cut even if Q4 GDP is weak. On Nov SoMP forecasts, the RBA expected Dec'19 GDP of 2.25%/yr, implying Q4 GDP at 0.65%/q. The 0.2% pt bushfire impact implies the RBA expects 0.4-0.45%/q print for Q4. But for the Bank to cut in Apr, we think Q4'19 GDP needs to print sub 0.3%/q.”