RBA Survey: Half of experts think RBA made wrong call with cash rate cuts

• • • • 42% of experts think the RBA made too many cuts, 8% say they've made too few in 2019
      • 87% of experts predict a hold of cash rate on Tuesday, 79% believe cut coming by May
      • Experts and economists predict house prices will rise across all capital cities by beginning of 2021

3 February 2020, Sydney, Australia – Economists are highly divided on whether the Reserve Bank of Australia (RBA) made the right number of cuts to the cash rate last year, according to Finder.

In this month's Finder RBA Cash Rate Survey™, 39 experts and economists weighed in on future cash rate moves and economic indicators, including wage growth and housing affordability.

When asked if the RBA was right to make 3 cuts in 2019, only half of the respondents said it made the right call (50%, 13/26).

Of the other half of experts who disagreed with the Reserve Bank's decisions, most (42%, 11/26) said the RBA should have cut less.

Graham Cooke, insights manager at Finder, said the RBA's decisions will never please everybody.

"On the one hand, some experts say the cutting was overzealous and is seeing house prices soar while most economic metrics have been stagnant.

"Others think the RBA hasn't done enough to repair the economy in light of lagging employment and inflation figures.

"One thing is clear: three cuts have reignited the housing market and pumped up property prices across the country.

"With more cuts on the horizon, it remains to be seen whether cheaper credit and lower rates will be an elixir or a poison pill," he said.

Economists were also evenly split on whether the bushfires added pressure to the RBA to ease the cash rate in February.

RBA cash rate expected to hold

Nearly 9 in 10 experts and economists predict the RBA will hold the cash rate in February (87%, 34/39) with just 13% expecting a cut.

The experts predicting a cut cited the bushfires, weak wage growth, low inflation and high unemployment as the main issues necessitating an easing.

Besa Deda of St.George Economics said: "In the absence of wage pressures, inflation remains well below target. More stimulus is required to return growth to trend."

Cooke noted the forecast for a rate cut in February dropped from 66% before the December meeting to just 13% this month.

However, economists say a cut is still very much on the horizon.

Nearly 4 out of 5 who made a forward prediction (not including February) forecast a cash rate drop by May 2020 (79%, 23/29).

A quarter of experts predict a cut in March (24%, 7/29), while nearly a third predict a cut in April (31%, 9/29). Another quarter predict a cut in May (24%, 7/29).

Only 2 of the 39 experts (5%) on the panel thought the eventual move, whenever it happens, would be a rise.

House prices to gain 5% in Melbourne and Sydney in 2020

House price growth across the nation is expected to continue with all capitals set to see growth by 2021.

Experts and economists were asked how much they expect prices to change in 2020, following the recent upward trend.

Of all the capital cities, Melbourne came out on top with an expected 5.35% price increase, followed closely by Sydney at 5.22%.

Not far behind were Canberra (3.81%), Hobart (3.52%) and Brisbane (3.32%).

Adelaide and Perth are expected to see smaller gains (1.86% and 1.81% respectively) with Darwin expected to gain just 0.30% by 2021.

Expected house value rises across capital cities

*Average of predictions from 20–23 economists, depending on the city. Inflation has not been taken into account.

**January 2020 CoreLogic Data, 12 months to Oct 2019

Cooke said this positivity in the housing market is in stark contrast to the prediction from a year ago.

"When we surveyed economists in late 2018, we were seeing average predicted drops in value of up to 8% by the end of 2020 in Sydney and Melbourne – now it's 5%+ increases.

"The pendulum has truly swung, which is welcome news for current homeowners and for those looking to buy," Cooke said.

Here's what our experts had to say:

Nicholas Frappell, ABC Bullion (Hold): "The case for another rate cut in February is fairly evenly balanced. The improvement in China-US trade negotiations should help the external sector over 2020. It's a tougher call relative to last year."

Shane Oliver, AMP Capital (Hold): "With the economy a long way from the RBA's full employment and inflation objectives, the bushfires likely to knock growth in the short term and the China coronavirus posing a new threat to global growth and tourist arrivals the RBA should be cutting rates at its February meeting. But against this it may decide to wait a bit longer given the decline in headline unemployment reported for December. Given the latter, we lean towards the RBA cutting in March. But it's a close call and a February cut would not be surprising."

Alison Booth, ANU (Hold): "The available information suggests the RBA will either hold (most likely) of drop interest rate."

John Hewson, ANU (Cut): "Running out of capacity so being cautious."

Julie Toth, Australian Industry Group (Hold): "Stagnant activity, investment, employment growth and unemployment rate."

Malcolm Wood, Baillieu (Hold): "Sluggish growth and inflation below the target."

David Robertson, Bendigo and Adelaide Bank (Hold): "Probably too soon for another RBA cut in February, after encouraging jobs data last week, but a few factors still suggesting another cut is looming."

Sarah Hunter, BIS Oxford Economics (Hold): "The recent labour market data has been more positive than we anticipated, so we've pushed back our call for one final rate cut to Q2 2020. But the forward indicators for jobs growth have continued to weaken (and the impact of the bushfires is a further downside risk), which means we still expect the RBA to cut one more time in this loosening cycle."

Ben Udy, Capital Economics (Hold): "While recent positive data have given the RBA a respite, we think sustained weakness in economic activity, a deterioration in the labour market and weak inflation will prompt the Bank to ease rates further."

Craig Emerson, Craig Emerson Economics (Cut): "Weak wages growth and the adverse economic consequences of the bushfires."

Trent Wiltshire, Domain Group (Cut): "The RBA needs to cut rates to push unemployment down to around 4.5% and to get inflation to rise. However, the RBA will be concerned about rapidly rebounding property prices. A reasonably strong labour force report for December 2019 shouldn't be enough for the RBA to pause the rate cutting cycle."

John Rolfe, Elders Home Loans (Hold): "I believe the RBA will hold off as long as possible to reduce further but will be forced to do so as I do not believe employment and wage growth will be strong enough to drive up retail spending."

Angela Jackson, Equity Economics (Hold): "While there were signs of improvements in economic conditions in late 2019, the impact of the fires and now the threat of a pandemic on economic confidence is likely to warrant a further cut to support economic growth. While the Board may move in February, I think on balance a March rate cut is more likely."

Mark Brimble, Griffith uni (Hold): "Competing forces and a desire to have some room to move will likely drive a hold position for most of the year. Bias to a decrease in rates if required."

Tim Nelson, Griffith University (Hold): "More time will be required for the RBA to assess whether current settings are on track for full employment."

Tony Makin, Griffith University (Hold): "Whether there's another cut will depend on how poorly the economy performs in the 2020 March quarter, taking GDP growth, private investment, unemployment, housing prices and the exchange rate into account."

Peter Boehm, KVB Kunlun (Hold): "I expect (hope) the RBA holds rates. The reasons for this include: 1. Dropping rates further is unlikely to help increase business investment and reduce unemployment – if rate reductions were going to have a material impact in these areas, they would have happened by now given the RBA's rate dropping strategy during 2019. 2. House prices, particularly in Melbourne and Sydney are returning to their 2017 highs and are currently showing double digit growth in most areas. This is not good for the market, the economy and borrowers – who are being forced to take on even bigger mortgages. We are creating a major mortgage debt problem which will only worsen once rates inevitably start to rise. 3. Low interest rates are not good for the banks. Their interest margin typically narrows in such environments which places pressure on profits and capital adequacy – not good companions for the financial impacts of the Royal Commission. 4. Pensioners and retirees who rely on interest income will see their finances and standard of living eroded further if rates are reduced again."

Leanne Pilkington, Laing+Simmons (Hold): "The sheer scope of the bushfire crisis has changed the outlook economically. While another cut early this year will provide further breathing space for mortgage holders, the potential impacts in terms of encouraging business investment remain unclear. Rates are already at historical lows and the three cuts of 2019 have not yet delivered the stimulus the RBA had hoped for."

Nicholas Gruen, Lateral Economics (Hold): "I expect the bank will hold. With latest employment data it is unlikely to cut. But I expect growth to continue sluggishly so there may be a cut or two down the track."

Mathew Tiller, LJ Hooker (Hold): "Positive employment numbers, strong property price growth and a record beating sharemarket should provide enough optimism to see the RBA hold the cash rate steady, at its first meeting of 2020. That said, soft retail turnover and household spending, bushfires, drought and global geo-political events all pose downside risks to the economic outlook over the coming year. Real estate markets are set for a positive start to the year with agents already reporting strong levels of enquiry and attendance at open homes. However, the number of properties on the market for sale remains very tight and this demand/supply imbalance is expected to drive property prices higher over the first half of 2020."

Geoffrey Harold Kingston, Macquarie University (Hold): "The fall in seasonally-adjusted full-time jobs last month may herald upcoming weakness in the labour market, notwithstanding the drop in the unemployment rate."

Jeffrey Sheen, Macquarie University (Hold): "Given the likely modest fiscal response to the negative impacts of the disastrous bushfires and the Wuhan coronavirus, I expect the RBA to cut the rate in March to 0.5%."

Stephen Koukoulas, Market Economics (Cut): "Low inflation, currently weak economic growth."

John Caelli, ME Bank (Hold): "It's likely the RBA will hold the cash rate in February, as employment data for December was relatively strong. The outlook for employment is a key element of any decision, so it's probable the RBA will wait until at least April to gather more employment data before making another assessment to cut rates."

Michael Yardney, Metropole Property Strategists (Hold): "The strong December employment figures will allow the Reserve Bank to delay its next cut in the cash rate while it evaluates our economy's performance and the effects of the tragic bushfires."

Mark Crosby, Monash University (Hold): "RBA still showing willingness to stick to more futile cuts in the cash rate, and expect one or two more cuts before they give up."

Susan Mitchell, Mortgage Choice (Hold): "Better than expected Labour market data should keep the Reserve Bank Board from cutting the cash rate in its first meeting of the year. December 2019 Labour Force data from the Australian Bureau of Statistics revealed that the unemployment rate fell to 5.1% (seasonally adjusted) from November. That being said, we would need to see consistent progress towards an unemployment rate of 4.5% in order to see an improvement in wages and inflation."

Dr Andrew Wilson, My Housing Market (Hold): "Improved labour market trend if sustained may foreshadow the end of the current rate easing cycle."

Jonathan Chancellor, Property Observer (Hold): "There are some tricky economic challenges confronting the central bank who will likely need to cut again sooner than later."

Rich Harvey, Propertybuyer.com.au (Hold): "The effectiveness of past rate cuts is taking longer than expected to filter through the economy. Wages growth still sluggish and businesses still debating investment decisions. RBA still awaiting further indications of softening before pulling trigger for next rate cut."

Matthew Peter, QIC (Hold): "The RBA will remain on hold in February, despite the potential impact of the Bush Fires. Better prospects for the global economy, the potential for a stabilisation in Australian consumer spending and a robust labour market provide the RBA with breathing space on monetary policy. With only two rate cuts separating the cash rate from the effective lower bound, the RBA is a reluctant rate cutter at this junction."

Noel Whittaker, QUT (Hold): "So much depends on economic conditions and the impact of the fires."

Nerida Conisbee, REA Group (Hold): "The economy isn't exactly firing but there continues to be at least some good news. Building approvals rose in November, albeit off a low base. Retail trade rose in November, although it may be just a Black Friday bump. Housing prices continue to rise. And most recently, the unemployment rate dropped. All of this points to Phillip Lowe's gentle turning point of the economy. At this stage, it does look like an interest rate cut this year is looking increasingly unlikely and there is no risk that the RBA will have to move to quantitative easing. Conditions can of course change dramatically over the course of 12 months."

Jason Azzopardi, Resimac (Hold): "RBA will assess further data to gauge impact of 2019 cuts. Cut seems inevitable given RBA announced unemployment targets."

Christine Williams, Smarter Property Investing Pty Ltd (Hold): "While unemployment has not moved, construction has started to recover slightly due to loosened regulations, but growth is still being held back by discretionary spending. The RBA will likely increase the cash rate in the second half of the year."

Besa Deda, St.George Economics (Cut): "In the absence of wage pressures, inflation remains well below target. More stimulus is required to return growth to trend."

Mala Raghavan, University of Tasmania (Hold): "The recent bushfire crisis will have a negative effect on the Australian economy. If this is coupled with global trade uncertainty and gloomy world economic outlook, it will drive down domestic household and business confidence and investments. Given these scenarios, there is a high possibility that the RBA will bring down the cash rate as low as 0.5% around the middle of the year."

Clement Tisdell, UQ-School of Economics (Hold): "No fall at this time. The housing market is strong."

Other participants: Bill Evans, Westpac.