Cut off?

Posted by

McCrann thinks so:

THE Reserve Bank will more than probably leave its official interest rate unchanged at its first meeting back for the year next Tuesday.

But the chance of a rate cut, while an outside one, is by no means quite as trivial as the market pricing and the economentariat consensus would have it.

It does seem unlikely given that both house prices and equity prices are up materially since the Dec meeting — so financial conditions have eased somewhat by themselves. However i agree with TM that with inflation being revised lower, and with the likely global growth downgrades (see weak Q4 US and UK GDP and the IMF downgrades in the Jan update to the WEO), it is a close run thing.


  1. The markets have run quite hard on not that much really. If anything, signals from the BoJ and BoE re more easing are less encouraging than they were a month or so ago. A bit of a pullback and the RBA could be back behind the curve. Path of least regret would be another cut in Feb or maybe March to help cement the emerging upswing.

    1. I would cut in Feb if it were just my vote, but the RBA thinks Q4 was about getting ahead of the mining dip, and the IO price means that’s later now. So on this rare occasion, i am tipping against my vote (first time in years).

  2. I am still tipping a surprise cut. House prices are up just because of seasonality and transaction volumes are going nowhere… only Sydney and Perth are healthy, but Perth is getting closer to the mining peak… credit grow is nowhere near the excesses of the last decade. New home sales? Lowest on record. We hit the all-time lows on an annual basis in Dec 2012. But we keep building more. Deposits and saving rate is still high.

    1. I think that if it were not for the endogenous easing delivered by the market, we would get one from the RBA. The TWI is back near the top of the range, so there has been some tightening delivered to offset the asset price growth, but i think that on net, financial conditions are easing.

      1. yes, financial conditions may be easing, but as you said on this blog before before: if you know you’ll need to cut, why delaying? :)

        1. I think they are very unsure about commodities and china just now – they were cutting at the end of last year with the end of the boom in mind, and the lift in commodities prices has made that seem less pressing. I think they have time to consider the evidence on this question — but yes, i do think that they will need to ease further to stabilise the unemployment rate. Jobs ads are still falling.

      2. If they want to be on time for the end of the mining boom, I think they better move swiftly. There are strong deflationary forces at play in the economy (including all the demand and inflation that was pulled forward and the high currency). The more they wait the bigger the damage. As you know I am thinking AUD (and my short position) :)

        Just recently, I had visitors from Europe over here, and again they could not believe how expensive Australia has become. A coffee $3.50 – $4.00 ! Unheard of anywhere else. The fact is, instead of 3, they’ll drink 2 coffees, as their purchasing power hasn’t changed at all, if anything they are worse off lately. And instead of visiting 3 attractions they’ll visit 2. So no mystery tourism is suffering, when local wages have been growing at 4% for several years.

        In my opinion, many economists are really underestimating the impact and ramifications of the high AUD on our economy. I personally think that if the AUD does not come down from here, or even worse goes higher, we’ll be in for a hard 2013 and 2014. But of course I might be wrong: things like China could be balancing on the positive side!

  3. Very dovish statement; looks like they got close to a cut. Congratulations, Ricardo, sheer brilliance – one couldn’t have predicted the contents of the statement any better than you have over the last couple of weeks.

    1. From the statement they really looked very close to a cut… but I guess they did not want to surprise markets who were not really prepared for it. They now have set a floor under share prices. Should markets begin a correction, they’ll cut immediately. 5000+ here we come.

    2. March bills still haven’t rallied. If I were a trader, I would be getting in there now.

    3. thanks mate. I feel like this one got away from me a little, to be honest. funny how your own notes can seem clearer to third parties.

  4. There’s one line in the statement that is quite concerning IMO:

    ” … On the other hand, there are indications of a prospective improvement in dwelling investment, with dwelling prices moving higher, rental yields increasing and building approvals higher than a year ago”

    Anyone noticing that dwelling approvals are higher than last year while new home sales in December were 6.6 percent below the level of a year earlier, and loan approvals to build or buy new homes the same month were 31 percent below an October 2009 peak?

    RBA did not even mention new home sales….

    1. I think this goes back to our earlier debate. You say that new homes cost too much to build in Australia. I say that is the very reason why established house prices first need to rise – to make it worthwhile to build new homes.

      1. if supply exceeds demand , it will not happen. 175 bps later, fewer new houses are being sold now…. and the unsold stock is accumulating

    2. yeah, i put this in the ‘fingers crossed’ basket. the trend in building activity is very weak — but i guess they are hoping that rising house prices sorts out the developer finance bottlenecks. good luck with that!

Comments are closed.