The venerable Chris Joye cut and paste his AFR stable-mate Alan Mitchell’s RBA preview:
It is … easy to imagine why the RBA may refrain from cutting the cash rate again on Tuesday – not because it believes the easing cycle is over but because there is no compelling need to cut for the second month in succession.
One of the key rules for RBA watchers is to listen — but I’m not listening this month. The reason: the Australian economy needs significantly easier monetary policy.
Inflation is running around 2% once supply / policy shocks are taken out, the unemployment rate is rising, job ads are frightening, export prices are tanking, investment projects are being delayed, fiscal policy is about to bite even harder in 2013, and with house prices falling 1% in October and housing credit growth at generational lows it’s difficult to see a developing asset price bubble.
Policy is not even easy. After accounting for spread widening, the 2007 equivalent policy rate is ~5%. And after accounting for the FX i judge that it’s about 5.75%. That is, the RBA’s policy rate is only slightly stimulatory for the interest rates sensitive sectors, and financial conditions are a little restrictive overall when FX is taken into account. If we add on the tightening impact of fiscal contraction at both state and local levels, we can get near 6%.
If the RBA does not deliver the rate cut that’s ~50% priced, the AUD will rise and financial conditions will tighten further. With the underlying economy weakening a given level of the AUD is getting ‘tighter’ as it gets ever more inappropriate given growth.
The best way the RBA can ease financial conditions is to bring the AUD lower by ‘beating the forwards’ and easing monetary policy more quickly than financial markets expect. I think they should do so this Tuesday, and judge that it’s a better than even chance that they do so.