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Bushfires may escalate chance of rate cut, say economists

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reporter 4 minute read

The ongoing bushfire crisis and its effect on the economy mean a February rate cut looks increasingly likely, according to analysts from AMP Capital, Moody’s Analytics and Saxo Bank.

Katrina Ell, economist at Moody’s Analytics, noted that the direct economic costs from the blazes have been severe, including hits to agriculture, tourism, household spending and worker productivity from enduring air pollution. 

As of 6 January, almost 6,000 insurance claims amounting to $375 million were related to the bushfires that have ravaged since November, according to the Insurance Council of Australia. 

Moreover, Suncorp revealed this week that costs for claims made in the first five days of January – during which states of emergency were declared in Victoria and NSW due to the fires – are already estimated to be between $75-105 million.

The total damage bill is set to rise significantly as the full scale of devastation reveals itself, with numerous fires still burning and yet to be contained. 

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“Odds were already high that the Reserve Bank of Australia will cut interest rates at its next meeting, in February, to bring the cash rate to 0.5 per cent,” Ms Ell wrote.

“The fires increase the odds.”

Saxo Bank has also taken this view, with Australian markets strategist Eleanor Creagh expecting the RBA will further decrease the rate once more in the coming year to 0.25 per cent.

“Raging bushfires, and a now resilient Aussie dollar lifting off support levels, will only add to the ongoing pressure on the RBA, particularly whilst the government continues to sit on the sidelines, leaving the heavy lifting to the central bank,” Ms Creagh said.

“The domestic outlook will continue to place downwards pressure on the currency’s recent rally and bond yields.”

Meanwhile, AMP Capital chief economist Shane Oliver has said that market probability of a February rate cut is now at 53.4 per cent, up from 36 per cent in early December.

“With the bushfires likely to contribute to a flow of weak economic data for the next several months, questioning the RBA’s ‘gentle turning point’ in the economy and resulting in a movement away from the achievement of the RBA’s full employment and inflation goals, the fires have only added to the pressure for more policy stimulus.

“We remain of the view that the RBA will cut the cash rate to 0.5 per cent in February... and to 0.25 per cent probably in March."

Mr Oliver added: “The bushfires will push up food prices and insurance premiums, but the RBA’s focus on underlying inflation will mean that it should look through this. In fact, increases in such prices will act as a tax on consumer spending power and are negative for spending and so could depress underlying inflation.” 

Ms Ell added that for now, it is too early to determine if the fires will lead to further monetary easing measures – with the blazes still burning and government responses still being fully realised. Fiscal policy also tends to be “more appropriate” than monetary policy, she added.

“The risk of adverse spillovers to the broader economy [is] high, given the scale of the fires as well as it being still early in the bushfire season,” Ms Ellis said.

“This bushfire season has months to run and could easily surpass the most costly recent fires, the Black Saturday fires in Victoria in 2009, which cost an estimated $4.4 billion. 

“In those fires, 450,000 hectares of land were destroyed. For comparison, 6.3 million hectares of land have been burnt in the current blazes.”

But the bushfires are only one symptom of the longer-term impacts of climate change, Ms Creagh warned.

“These impacts are not just a one-off, longer-term effects of a warmer Australia will continue to pressure agricultural productivity, tourism and other industries,” she said.

“A continued increase in frequency of extreme weather-related events poses a long-term risk for the economy.” 

However, Mr Oliver noted the bushfires will be followed by a boost to spending, when rebuilding kicks in.

He believes although the bushfires are estimated to knock around 0.4 per cent from March quarter GDP – risking near zero growth or below, the risk of a recession remains unlikely. 

Mr Oliver pointed to strong infrastructure spending and mining investment and a weak Australian dollar boosting growth as well as further fiscal stimulus in the short-term being likely.

But Ms Ell cautioned: “In this circumstance, rebuilding could be delayed for months, since many fires are ongoing, and this is only the start of the usual bushfire season. It could be some months before efforts move from fire containment to rebuilding.”

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Bushfires may escalate chance of rate cut, say economists
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