Reasons for the RBA to cut 50bps in May

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…

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8 Responses to Reasons for the RBA to cut 50bps in May

  1. On your Marx says:

    Howes comments were vastly different to Gillard’s. The May meeting has nothing to do with the RBA reacting to fiscal policy emanating out of the next budget.

    We knows the RBA targets RETAIL rates through wholesale rates.

    I think 50 points is the batter choice as the RBA has consistently over-estimated the impact of commodity price boom mark 2 and thus the present budget’s contractionary stance has had more impact.

    The RBA cannot target the $A nor should it.

    Remember it is much easier to raise rates if things start to pick up quicker than expected.
    We have not had GDP growth at trend since March 2008!

  2. 3d1k says:

    Well done. Knew you’d be right.

  3. Rajat says:

    Good work Ricardo.

  4. Manny says:

    Look who’s laughing! :)

  5. 3d1k says:

    Well. done – thought you were on the money.

  6. On your Marx says:

    kouka rules

  7. BK says:

    Fantastic call. This is why this blog is one of Oz’s best econ blogs.

    The only downside is you do not post enough! Let me guess…your real job gets in the way?!

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