RBA cuts demand – May cut likely

Posted by

I got a bit lucky on the RBA today. I was right – they held steady at 4.25% – but the truth is I had my reasons wrong.

Experience has taught me that the unemployment rate is the best indicator of the economy’s state, and as it had been steady at ~5.25% for three quarters, I judged that the RBA would continue to assess demand as around trend.

Thus, I concluded, the RBA would hold steady – for they lacked evidence that there had been a material weakening of demand. The last line of the Bank’s statement said otherwise – the demand test had been met:

The Board’s view was also that, were demand conditions to weaken materially, the inflation outlook would provide scope for easier monetary policy. At today’s meeting, the Board judged the pace of output growth to be somewhat lower than earlier estimated, but also thought it prudent to see forthcoming key data on prices to reassess its outlook for inflation, before considering a further step to ease monetary policy

So – clearly the RBA is waiting for Q1 CPI on 26 April. You might argue that unemployment is also a key bit of price data (that’s sure how i think of it), so my mental model isn’t totally wrong … but for sure, I’ll be paying more respect to GDP from now onward.

My point forecast for Q1 Core CPI is a little below 0.6%q/q, and I think that will be low enough for an easing. My guess is that the Government will leak like crazy about how tight the budget is going to be, and then try and pin their star on a May cut.

They are probably hoping for May+June – which will take an increase in unemployment, as well as a tight budget and contained inflation.


  1. I am with Kouka. the economy is much weaker than the official thought it would be.

    The RBA does not cut on what the government says it will do. It does so on hard numbers. So the budget needs to reduce GDP by at least 1 % for it to act on it. It knows the difference between accounting fiddles and proper economic measures.

    I think there wil be both otherwise the Economy is gong to get one helluva shock from the public sector.

    If the commodity boom finally begins to match the officials expectation then it is quite easy to raise rates.

  2. The Kouk and Bill Evans should be running the joint. They have been soooo much closer to the mark than the RBA, Treasury and ABARE/BREE.

    I’m still waiting for the bullhawks to concede. How long do you have to be wrong for? Its been more than a year now. 2 years? 5 years?

    1. Amusing. I think it is a false dichotomy. If we did not have mining and a few other benefits there would have been no rate hikes – which is the case in most nations.

    1. Perhaps. They were already there on demand … But multiple 25bps moves now seems most likely.

      I should think that 3.25% by year’s end is plausible.

      Sent from my iPad

      1. Amazing how quickly things can change. I was expecting 3.5% only a few months ago, then had to backflip only a month ago thinking 4% bottom if we’re lucky. Now we’re looking at 100bps of cuts!

        If I were Stevens I’d go 50 in May to make an immediate impact, then 2 x 25 bps in June and July/August. But like you said 25 bps cuts are more likely

        1. After thinking it through, i would start with 50 as well. The board will ask for it, and the Bank will expect to be at least 50bps lower when done, so i cannot see how strong arguments could be made against it.

          Sent from my iPad

  3. Hard to disagree with you .

    I think kouka is correct. The RBA has been waiting for commodity boom 2 for too long.
    They need to cut now.

Comments are closed.