Will the RBA cut rates on coronavirus concerns?

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Many analysts are making the case that the RBA is increasingly likely to cut rates. This is due to the potential economic impact of the COVID-19 outbreak. On the other hand, many are arguing that it’s too soon. With this lack of agreement, there could be significantly more volatility in the markets after the rate is announced. Though one of the factors inclining towards a rate hold is that no conference call is currently scheduled for after the meeting.

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Despite the differences in outlook and opinion, the summary of expectations is that the RBA will keep rates on hold this time around. What the market will be very keen on is the accompanying statement. This will provide clues as to when the next rate cut will happen. Price action is likely to be all about timing; what is being priced in, it’s the when that leaves actionable uncertainty.

What are we arguing over?

The consensus of analysts is pretty strong on the fact that the RBA will cut rates. The majority inclining toward two rate cuts this year. This would put the rate at 0.25%, and below the level at which Governor Lowe has repeatedly said that unconventional measures would be required. So, now the market is not only interested in rate cuts, but what kind of measures the reserve bank is considering, in order to gauge their potential impact.

The disagreement between analysts is over what will happen in the next two meetings. 85% of Australian economists surveyed expect the RBA to keep the rates as is, with a majority projecting a rate cut at the next meeting. Among international economists, only a simple majority believe the RBA will hold rates. But 83% of them agree that a rate cut will happen before the end of May.

Getting a handle on the trajectory

Virtually 100% of analysts agree that the interest rate will be at 0.50% at the start of June. International analysts project the rate cut to happen during the April meeting. However, Australian analysts incline towards the cut happening at the May meeting.

If the statement from the RBA puts a heavy emphasis on cutting rates sooner, that would incline the scales towards an April cut. This would likely drag down the AUD. On the other hand, if the statement takes a more wait-and-see position in terms of the COVID-19 effects, then we could have some support for the AUD as it would incline the consensus towards a May rate cut.

Hope for a rebound

We should remember that there still is a consensus among most institutional analysts that the outbreak will have a V-like impact on the markets. They point to a couple of reasons for this. This includes past outbreaks of other coronavirus strains, such as SARS and MERS. Already China is reporting that the number of cases is diminishing and, what is crucial for Australian trade, restarting factories and taking in new shipments of raw materials. The number of containers waiting to be processed in Chinese ports is on the decline.

On the other hand, the number of cases outside of China is still on the rise. Even if it follows the same pattern as the first outbreak, we could be looking at at least another month of economic impact, which just might be enough to tip the world into recession.

That’s the dilemma facing the RBA, and they don’t have any more information or expertise on the subject than any other financial expert. Rather than predicting a direction, it’s probably better to say there will likely be more volatility for now.

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