A More Dovish Fed And China’s Structural Slowdown As Good Enough Reasons For RBA to Remain On Hold

The Reserve Bank of Australia (RBA) is anticipated to leave the cash rate unchanged at the historical low level of 1.50% until the end of 2020. After a terrible December, with a much tighter credit market and weaker business sentiment in the US, the FED turned into a more dovish stance in January. Among the many implications of a more dovish FED for a portfolio flow dependent, small open economy like Australia, one very obvious good news is that it contains mortgage payments for Australian households. At the same time, at the National People’s Congress today, Primer Minister Li Keqiang has fully confirmed China’s structural slowdown by bringing down growth targets from a target of 6.5% to a range of 6% to 6.5%, which is not good news for Australia down the road. However, the announcement also points to the necessary stimulus to reach such targets. In other words, we should not expect very negative news from China for Australia that could push the RBA for an additional cut. Thirdly, Australia is pondering infrastructure investment and a new fiscal stimulus to be announced before the May election, which could lift business confidence and support employment and, thus, barring out an additional cut. All in all, although the risk to our view is on the downside, we do not see any immediate reason for RBA to lower the cash rate further even if the FED has clearly opened the room for a much softer global stance.