Will 2019 see an interest rate cut? Employment data holds the key

Aussie dollar tumbles; U.S. shutdown jitters dent stocks

Australian central bank chief Philip Lowe (picture) shifted to a neutral policy outlook as he acknowledged increased economic risks at home and overseas, sending the nation's currency down by more than half a United States cent. "But now things are more equally balanced", Lowe said.

As many economists predicted, the Reserve Bank of Australia (RBA) kept the official cash rate unchanged at 1.5%.

The dollar index, tracking the unit against six major currencies, rose 0.2 percent, with the euro down 0.3 percent to $1.1378.

Mr Kolenda said the timing of the next RBA move will hinge on the federal poll, which must be held by May this year. "There is a high degree of uncertainty and risk and that argues for a more patient Reserve Bank".

Australia's central bank was the latest to signal policy easing in the face of economic headwinds.

"Indeed, a rate hike looks to be off the cards for the foreseeable future".

In the event of a sustained increase "in the unemployment rate and a lack of further progress towards the inflation objective, lower interest rates might be appropriate at some point".

Australians have been hanging onto their money for longer with spending having long-remained flat, depriving the economy of added stimulus. "GDP growth was strong in June but weaker in September".

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Sally Tindall, research director at RateCity.com.au, said banks have tightened the screws over the past year to make sure people aren't in loans they can't afford to repay, but the clampdown has only made the banks hungrier for the right type of customers.

"It's still entirely plausible the next move will be up", the RBA chief said.

The consistent bright spot for the RBA has been the labour market.

"And rightly so, because the downside risks in the global economy have grown, and the downturn in the housing market in Australia has deepened".

"The weeks preceding the RBA meeting saw several smaller lenders pushing mortgage rates higher in response to persistently high funding costs, following an average 14 basis point rise in owner-occupier mortgage rates since September past year". At the moment, jobs growth is running at 2.3% (a little above the long-term average of 2%), and the unemployment rate is 5%. If that pans out, the RBA expects wages growth and inflation to pick up gradually over 2020.

The dovish shift by the Fed, along with evidence of slowing growth in Germany in the form of falling industrial orders for December, also pushed U.S. Treasury yields lower.

"We think they'll have to cut twice and that's going to put a lot of downwards pressure on the Aussie dollar".

Lowe said the adjustment in house prices was "manageable", although he also said it was very hard to model house prices. "We have the flexibility to do this if needed".

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