1 and done for Tezza

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Terry McCrann tips a 25bps cut for November, but says that is it.

I doubt that. The RBA doesn’t fine tune. They would not move unless they thought they had more to do.

I think that H1’11 CPI was an aberration, and that underlying is running ~2.25%y/y. So the Bank probably had their Q3 SOMP CPI forecasts ~100bps too high. A 100bps cut in your CPI projection will get you ~150bps of easing on a standard 1.5x Taylor Rule.


  1. Sorry but … Terry McCrann has been wrong the whole year now, calling for rate hikes. And now, all of the sudden he sees a rate cut ??? That would be the biggest joke ever. We got 0.3% + 0.8% core in the last 2 quarters, so that’s about 2.2% annualized… that’s not inflation that is too low… that’s exaclty where you want to be. Main inflation is still at 3.5%: far too high. Unemployment at 5.2%: isn’t that also just right? Coming November we will see if the RBA is serious about fighting inflation in Australia. If they cut, they can’t blame no one else should inflation go back to 3%. This is really the time when the RBA should put Australia on a sustainable forward economic path and not on a roller-coaster. The cash rate is too important to many families, it can’t be played with. If now it’s not the time for monetary austerity in Australia, then in till never be.

  2. Taylor rule also depends on output gap. So it matters whether the RBA thinks it has gotten that right in last few months. If they think they’ve underestimated gap then greater likelihood of easing. If they have overestimated then less. But Taylor rule gives more weight to inflation, plus gap should be pretty close to zero overall. Given where inflation is sitting cuts unlikely until gap opens or inflation drops below target. So I think neutral is probably where they will end up. Keep ammo dry should eu or china meltdown

    1. Inflation is our best guide to the output gap , and it suggests we are still running with some spare capacity. I make full employment about 4.75% so 5.25% leaves a decent gap. Neutral is at least 50bps below, if not further given the currency, so a few cuts are possible.

      I do not know the future, but history tells me each easing cycle starts like this – scepticism of the need to cut, fine tuning the meme when they do – and that each cycle delivers more cuts than are priced and A lower low for the cash rate.

      Sent from my iPad

  3. Remember Rick did say that we have yet to see Commodity price Boom 2 actually impact the economy yet.

    I wouldn’t be easing with those effects coming in very soon.

  4. I agree with Rudebusch at San Francisco Fed on Taylor rule.

    Central banks should only use a forward looking Taylor rule which rules out a rate cut depending on your assumptions of the commodity boom.

    1. I use a fwd looking one. 1yr ahead inflation forecast and 6m ahead UR.

      The RBA is a rule follower – it fits the data well. If their forecast is 2.5% and 5.5% they have ~100bps of scope to ease.

      I think this cycle is a lot like the 96 cycle. The market was pricing hikes when the RBA cut in 96 and the RBA ended up delivering 275bps of easing by the trough.

      RBA will tip toe down 25bps at a time, but it is possible that they will ease a very long way. We may yet end up with a very strong currency and a much lower cash rate.

      Sent from my iPad

    1. i am coming to think that australia is transitioning from a ‘risk’ market to a safehaven. The buying of ACGB by the foreign sector evident in the financial accounts is a new phenomenon, and i suspect it is related to the strength of the sovereign. It is possible that the RBA cuts and the demand is sustained – after all, we would still offer a high yield and a great credit.

      If that occurs our policy mix would shift toward lower rates and a higher currency. It should also keep downward pressure on prices for some time. We would not be the first to make such a transition.

    1. Well, Q3 almost certainly was too low – but that is because the prior two quarters were too high. It seems most probable that the high Q1 and Q2 numbers were caused by a series of supply shocks, which created a broadly based inflation in those quarters, and boosted the statistical trims. Now that the supply curve is shifting right again, we get broad based disinflation which lowers the statistical trims – but once it is done, inflation is not going to remain at 0.3%qoq.

      Say it is worth 20bps per quarter, in the relevant directions for Q1 to Q3, then we have an underlying pace of ~2.25%yoy for the year to Q3. This also happens to be the 2q and 6q average.

      That feels right to me.

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