CHART OF THE MONTH
RBA - will they or won’t they?Patiently waiting for jobs/output resolution
Central banks around the globe became more dovish following a slowing in the global economy over the latter part of 2018. The Reserve Bank of Australia (RBA) joined the pivot, changing its forward guidance from a tighening bias to neutral bias.
Financial markets have front-run central banks, with both the US and Australian markets pricing in monetary easing. In the US, the cash rate is at the bottom end of the neutral range.
In Australia, monetary policy is accommodative (a falling unemployment rate is testament to that), yet markets have moved to price in a cash rate of 1% and three and 10 year government bonds have fallen to historical lows.
A factor behind recent moves has been the spectre of weaker activity data. The Australian economy grew by 1.9% over the first half of 2018 and only 0.4% over the second half of the year, yet the labour market has held up and actually improved over the second half of 2018. This momentum has carried over into 2019 with employment rising by 21,500 on average over the first two months of the year.
Whether market expectations for further cuts in the cash rate are realised will depend on how the gap between output and employment closes. If the labour market holds up and output recovers, the most likely scenario is for the cash rate to remain at 1.5% over the next couple of years. Sluggish growth that drags the labour market down with it would see the RBA validate market expectations.
Source: Janus Henderson Investors, Australian Bureau of Statistics. * monthly average to February 2019. As at 31 March 2019.
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