Bushfires increase odds of a RBA rate cut in February - Moody's

author-avatar By on January 08,2020
Bushfires increase odds of a RBA rate cut in February - Moody's

Photo by Matt Howard on Unsplash

The already strong likelihood of the Reserve Bank of Australia (RBA) cutting Australia's cash rate to a record low of 0.50% has increased further due to the economic cost of the bushfires raging across the nation.

That's according to Katrina Ell, economist with financial intelligence company Moody's Analytics, who said the damage bill from this summer's devastating fires could exceed the $4.4 billion cost of the 2009 Black Saturday fires. 

"In those fires, 450,000 hectares of land were destroyed," she said. 

"For comparison, 6.3 million hectares of land have burnt in the current blazes."

It's been widely predicted that the RBA would cut the cash rate by 25 basis points in February, with unemployment figures and inflation still well off the central bank's desired targets. 

Although the fires increased the chances of a cash rate cut, Ms Ell said it was too early to say for definite whether the fires would lead to monetary easing measures, with fiscal measures more appropriate.

"This is because the fires are still burning and the federal and state government responses are still being determined," she said. 

"They will heavily influence the macroeconomic impact.

"During a disaster, a fiscal response tends to be more appropriate than monetary easing.

"Fiscal measures can target the particular areas concerned, whereas monetary policy has a blunt impact." 

A fiscal response came on Monday, with Scott Morrison and Josh Frydenberg announcing a $2 billion commitment over two years to bushfire recovery.

Ms Ell said these much needed funds would help to fast-track the rebuilding of communities but has forced the government to revise its projected budget surplus. 

"The bushfires have also triggered the government to lower its commitment to restoring the federal budget to surplus within the current financial year.

"This potentially gives the government more flexibility to support the rebuild efforts and the broader economy.

"The projected budget surplus was already reduced to A$5 billion in the 2019-2020 financial year under the midyear economic and fiscal outlook that was released on 20 December." 

The government has been criticised heavily over the summer, with the Opposition and economists questioning the purpose of a budget surplus when many departments faced with tackling the blazes, such as the NSW Rural Fire Service, were under-resourced. 

GDP, tourism and consumer confidence all take a hit

AMP Capital chief economist Shane Oliver told the AFR that the damage from the bushfires would shave between 0.25% and 1% off gross domestic product (GDP). 

That works out to be somewhere between $3 billion and $13 billion and with Australia's economy growing at just 0.4% this year, Ms Ell said its something the nation can ill afford. 

"Household final consumption comprises around 55% of GDP.

"With households buckling down further and expectations that the local economy will continue to weaken, the odds rise that consumer concerns will grow into self-fulfilling prophecy. This has flow-on impacts to businesses."

Additionally she said that the bushfires across the eastern state have dealt a significant blow to the peak tourism season. 

"Visitor numbers are significantly down in summer hot spots as smoke haze and uncertainty about safety keep local and international travelers away.

"Dollar losses in tourism are estimated in the “hundreds of millions” during the peak season, according to the Tourism Council." 

After Tourism Australia had to pause its new $15 million ad in the UK, Scott Morrison today attempted to drum up support for the industry at a press conference saying, "Australia is open, Australia is still a wonderful place to come and bring your family and enjoy your holidays." 

Meanwhile, the ANZ - Roy Morgan weekly survey of consumer sentiment found confidence in the economy fell by 1.7% to 106.2 points. 

That's the lowest New Year reading since the Global Financial Crisis, while sentiment towards the future economic outlook is at its lowest level since 1994. 


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Alex joined Savings.com.au in 2019. He is passionate about providing Australians with the information and tools needed to make them financially stable for their futures.

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