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).