RBA on hold at 4.25% in Feb

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Last night’s EU PMI data (which suggests EU growth may have hit the nadir in Nov) and today’s Q4 AUD CPI numbers make a fairly good case for the RBA to hold their key policy rate at 4.25% at their 7 February 2012 Board meeting.

Q4’11 Core CPI printed at +0.55%q/q (weighted median +0.5%q/q and the superior trimmed mean at +0.6%q/q) – which is above my early Dec forecast of ‘sub 0.5%q/q’. Some prior upward revisions lifted the YoY rate for both measures to 2.6%y/y (mkt 2.4%).

The global backdrop is better now than in Dec (US picking up, China isn’t hard-landing, EU growth pulse is quickening and credit crunch receding), the domestic growth data remains around trend, and abstracting from shocks, CPI looks to have been running at around 2.5%y/y for the best part of six quarters (H1 CPI was biased up, and H2 was biased down).

So, the RBA has the economy pretty much where they want it – and it’s also pretty much as they expected. The unemployment rate has been steady at ~5.25% for some time now, growth has been around trend (I think a touch sub-trend, but their assessment was ‘basically in line with trend’ at their Dec meeting), and it looks to me that asset prices are starting to stabilise / rise (equities up, houses look about flat).

Given these factors, the RBA will probably not downgrade their growth forecasts or lower their inflation forecasts in the Q1 SOMP (released on 10 Feb, following their 7 Feb Board meeting). With no downgrades, i cannot see how they can go from describing the Dec move as a close call (‘this did not suggest any strong need to cut interest rates’) to cutting in February.

It just wouldn’t make sense … of course, there are almost two weeks before the Feb meeting, and there are data and events that could given them a good reason to ease further – but right now, i do not think that the case can be made.

Finally, there are three rate cut memes that i want to address:

1/ the RBA will cut to help the banks — the NIM loss from debt issued at recent wide spreads is ~1bps so far; the RBA has time to wait and see if funding margins stay permanently wide before they need to step in and protect major bank NIMs.

2/ the RBA will ease because of the AUD — the currency is too volatile a reason to act; doing so raises the risk that you’ll have to unwind the action (note, i’m explicitly leaving open that it’s a good reason to defer action). The AUD averaged 1.0619 (TWI 77.47) in Q2’11; 1.0492 (75.85 TWI) in Q3, 1.0118 (74.83 TWI) in Q4, and has averaged 1.0348 (76.84) in Jan’12. It’s in a range folks …

3/ The RBA will cut and say that they are now on hold — the RBA tends to try and avoid commitments about the future. So i think they’d sooner stay on hold at 4.25% and say that they are ready to ease if required than cut and say that they are on hold (this is another manifestation of the point i made w.r.t. the AUD, above … it’s easier to wait and see than to undo something).


  1. I think they will cut 25 points.

    Core inflation on a six month annualised basis is 1.8% with the trend falling.
    Fiscal policy is quite restrictive with the output gap increasing a bit.
    Europe may be getting better. ( Isn’t it ironic it will be because Germany isn’t pursuing Austerity measures they believe all other countries should pursue).

    A cut of 25 points gives the RBA the act of helping the economy when it may well need it.

    If the world economy improves then they can easily increase rates if needed. Monetary policy would be either neutral or just a tad expansionary depending how you measure it.

    1. Could do – but for mine they cut because of the global outlook despite it being a close call on domestic grounds. The domestic situation has not changed much and the global situation is improving.

      As for CPI, you know what i think – in hindsight it was all shocks. It was never running at 3% in H1 and now is not now running at 2%

      Sent from my iPad

  2. Well … I think its a tad premature to declare Europe’s problems over! Ditto for China, although the US is looking much better.

    Euro austerity still has to play out (didn’t the UK shrink in Q4?), the periphery is still a basketcase, and if the Fed does QE3 it will erode German competitiveness.

    The Chinese real-estate story is just beginning. The psychology of property-prices-always-rise to property-prices-are-falling has changed only very recently. Property busts can take on a life of their own, despite the near universal faith (amongst Western economists) in the Chinese Communist Party’s ability to manage an old-fashioned capitalist bust. Putting aside Chinese exceptionalism for a moment, in all of human history, the bigger the boom, the bigger the bust, and there has never been a bigger real estate boom. Ever.

    As for Australia, all the pain and misery will be inflicted on the non-mining trade-exposed sectors (again). They have become the whipping boys of the Australian economy, but while the China story is intact, and commodity prices are strong, no-one cares.

    Australia is like a one-industry town, that indulges while the sun shines, with no thought to a future when its one industry goes into decline. Visit Detroit, or the steel-making belt in America to see what happens.

    1. sure, lots of things can still go wrong – but who knows, maybe things could go right as well. we have trend-ish growth, 2.5% inflation and neutral policy. I think we’re well placed to wait and see.

      1. Pretty much everything has to right in Europe for it to return to reasonable growth. Best case scenario is more “muddle through” with anemic growth in the core and grinding recession in the periphery. Worst case scenarios are numerous and horrific.

        1. Agreed, but it only matters for my aussie cpi forecast if it is horrible – they never contributed much to global growth in any case, and even less to Aussie growth.

          Sent from my iPad

      2. I actually agree, there’s a good chance they’ll stay on hold after two successive cuts, and because the global economic situation seems to have calmed down over the holiday period … but then, things may have calmed down simply because a lot of bankers went on holiday.

        As for China not hard landing, perhaps you should check this out:
        The China growth story (especially for Australia) is all about building stuff, not making stuff.

    2. Bugger. Stuffed up the link. I’ll try again…

      China: digger sales in the ditch

      Lets face it, the Chinese GDP numbers are more fiction than fact, and indicators such as electricity consumption proved to be far better indicators of economic activity during the financial crisis.

      1. Check out the CAT and DE equity charts – there is clearly something positive happening in the ‘heavy’ sector. By the way, they look a lot like the AUD…

        I think they are both responding to a common third factor – the outlook for the industrialisation of Asia.

        Sent from my iPad

  3. So Chinese digger sales are at a 3 year low, but CAT and DE have had a one month rally on the NYSE. Rallies on stock markets can be driven by anything from wild speculation to short squeezes. Besides, CAT & DE could be rallying on an improved US outlook more than anything else. Its a big leap to conclude they’re rallying on the industrialisation of Asia which is a multi-decade story.

    I mean, CAT fell in a hole between July and September. Was Asia not industrialising then?

    I’m sorry, I place more faith in digger sales data than what equity markets are doing.

    1. right you are, but they are better predictors than most people. these equities and the AUD are telling the same story.

      i suppose the counterpoint is that everyone is very bearish and though that sentiment may ultimately be justified, they are vulnerable to a squeeze. we will find out before too long.

      1. Remember the post-tsunami rally in everything “undollar” in April last year? What did that predict?

        i suppose the counterpoint is that everyone is very bearish

        Bullish sentiment in the US is at an 11 month high, and well above historical averages.

        Forbes: Big Jump In Bullish Sentiment

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