Reasons for the RBA to cut by 25bps in May

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Thinking about Tuesday’s RBA meeting, I struggle to find good reasons to cut by ‘only’ 25bps. I try to be unbiased, but clearly there is a risk that this is because I hold the alternate view!

So why Might the RBA deliver ‘only’ 25bps? Here are the reasons I could think of, and my response.

1/ They do not believe that Q1 CPI is accurate.

R: A broad range of pricing indicators suggest price pressures are fairly subdued. The weakness was not just FX or food related. It looks like core inflation has been 2% to 2.25% for 2yrs.

2/ They think that the optimal rate is 4% given what they know

R: To believe this, they would have had to lower their unemployment forecast from 5.5% – which seems unlikely, given that they have also cut their GDP forecast.

3/ They might end up being too easy, if the recent improvement in the data is sustained (say the unemployment rate falls in the April report).

R: this is a risk, but given that both State and Federal budgets are going to deliver further tightening, that the AUD remains ~1.05 despite over 100bps of cuts being priced, and that inflation is very low, the risk seems small.

4/ It might damage their credibility – it looks like they are admitting they were wrong

R: the usual suspects will complain that they do not get it if they cut by 25bps.

5/ It may frighten folks and therefore make things worse

R: a tiny risk. Consumers love rate cuts, and firms have been hoarding labour and remain worried about the demand outlook.


  1. Spoke to a real estate agent friend of mine last night. He said that one seasoned top notch agent hadn’t seen auction clearance rates experienced the last few weeks this bad in 30 yrs. Plus he said there was heaps of stock they’ve got on their books but that they aren’t listing – no buyers. This is anecdotal of course. I am not suggesting the RBA should use housing as an indicator of MP. Just saying that it seems like things are pretty rough in some parts. 50bps would probably be good.

    1. I am hearing similar anecdotes – hard to sort the structural change out from the softness, but i am persuaded that the bank is at least 50bps too tight.

      Sent from my iPad

  2. I think it’s the exchange rate that has messed up their forecasting. They clearly thought it was going to depreciate given the decline in the terms of trade, but flood of offshore demand for acgbs prevented that. That’s why they were harping on about non-tradeables so much in q1, preparing everyone for a weaker exchange rate to reveal sticky inflation IMO. Fiscal policy is tightening up a bit in coming quarters, and I doubt offshore has the appetite for semis given the poor liquidity on display over q1. so I think this demand for aud assets slows and the exchange rate weakens and the rba get their told you so moment when tradeables go up and non-tradeables are their usual 0.7 qoq. Non-tradeables were 3.6 yoy in q1 by memory – productivity is less than 1% p.a. so there’s your medium term 2.5% inflation. (i am wary that aud is holding up despite aofm back to one a week)

    So don’t think they’re ready to eat that much humble pie to give us 50bps tomorrow. Only been credit crunch and tech bubble burst when they’ve done anything other than 25bps in recent times.

    All this said, no huge amount of confidence tomorrow. This board is a bit of a wild card. And I find it very hard to argue against the case that if rates need to be 50bps lower, why not get it over with now. Rba have a history of doing what’s necessary.

    Splinters in my bum much?

    1. i think that the most persuasive argument is that if they think they need to be 50bps lower, why not get there right away? it means that they can forecast 2.5% CPI without having to resort to flipping back to the market pricing assumption, in the SOMP.

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