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.