Following on from my last post, I thought it would be interesting to note down the reasons I think the RBA will cut by 50bps, and what I see as the best counter to each argument.
1/ the optimal cash rate is at least 50bps lower.
R: the RBA is a conservative institution, and can take its time getting there. A month here or there does not matter much.
2/ the RBA needs to cut 50bps to get a meaningful cut through to retail punters
R: the RBA should not pre-empt bank margin expansion. To do so gets them embroiled in an unwinnable debate.
3/ Needs to be sure to cut through with the media – so as to boost household and firm confidence.
R: two rate cuts is twice the number of media events – even if you do not get the front page
4/ they want the AUD to go down – not up – so they need to beat the forwards
R: you should not aim at what you cannot hit – we will just react to the AUD if it goes against us after the fact.
5/ surprises move the market and hence the economy – and the economy needs a shove just now
R: quite a lot of easing is priced, possibly more than they would like to deliver.
6/ neutral may be below 4%
R: it may also be above it, so let’s take our time
7/ with unemployment expected to rise, there is more chance of below target inflation than above target inflation in a year’s time.
R: at 4%, there is ample scope to react to further downside inflation surprises, should inflation become too low.
8/ a 50bps cut will allow the RBA to forecast a return to 2.5% CPI in the May SoMP (assuming they stick with their constant cash rate assumption)
R: they will forecast what they like – and if they want more inflation they will simply move back to assuming market pricing for the cash rate path.
9/ a 50bps cut will satisfy many of the RBA’s critics (well, at least most of the sensible ones).
R: it looks like they are giving into Mr Howes and Ms Gillard
10/ Real rates! As inflation is 30bps lower than the RBA expected, the real rate (the one that does all the work) is 30bps higher than they expected. Thus, they need to cut by 50bps just to get the real cash rate lower than where they had figured they were in April.
R: we live in a nominal world…