Mitchell says no cut in July

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The AFR’s star RBA watcher, Alan Mitchell says that the RBA doesn’t need to cut rates at their July meeting.

But, for the moment, the central bank is off the hook, if it wants to be.
The seasonally adjusted labour force data showed the unemployment rate falling in May, from 5.6 per cent to 5.5 per cent.

That is what the financial market is focused on. The drop in the seasonally adjusted unemployment rate might have been just statistical “noise”, but it was enough to cause the market to cut the priced-in probability of another cut in the official cash rate in July from 45 to 32 per cent.
A decision by the RBA board to sit on its hands in July would be uncontroversial, and probably that is what it will do.
Here is the problem: no one knows for sure if the RBA has cut interest rates by enough. You and I might think the bank will need to cut some more, but the people on the RBA board have to worry about the risk that they already have cut too much.

I happen to think that the RBA has more work to do, but the data over the last few weeks hardly helped the case that was made by the weak details of the Q1 national accounts.

If they were on the edge following Q1 GDP (and i think they were) the stable unemployment rate will have encouraged them to judge that the Q1 national accounts were maybe a bit weaker than was actually the case.

Reflecting this … Mitchell says they should not cut in July. I think they should, but at this point in the monthly cycle, when all the major data is in, it pays to listen. What i am hearing is that the RBA plans on waiting to see Q2 CPI.

All things considered it was not too much of a surprise when, in the wake of the Australian dollar’s 10 per cent depreciation against the currencies of our main trading partners, the RBA governor, Glenn Stevens, seemed to raise the bar for further rate cuts.
Announcing the RBA board’s decision to leave rates on hold in June, Stevens repeated the bank’s by now routine reassurance that it was ready to cut interest rates if that was appropriate. However, this time there was a sting in the tail of the announcement. The RBA board, Stevens said, “judged that the inflation outlook, as currently assessed, may [my emphasis] provide some scope for further easing, should that be required to support demand”.
What that says to me is that information about what is going on in the economy is at an even higher premium.
They shouldn’t cut rates when they don’t have to – and, on the current data, they don’t have to in July.


  1. there is no reason not to cut either. they can wait if they want to (wait for what i do not know). cut too much? what, we’ll be the only country in the world with an inflation problem? not even in china there’s inflation. Think that things are only going to get worse from here. let’s use the underemployment rate instead of unemployment. Anyway , if markets keep correcting they’ll cut for sure in July.

      1. that’s a good point. they cannot stop with that AUD at fair value, the AUD is likely to bounce — so unless the US tightens and the rest of the world picks up …

  2. I just want to reiterate Glenn does not tell anyone anything more than what he says in his speeches. nor do anyone else at the RBA.

    Things have changed a lot since Supermac talked incessantly to the major economic journos

    1. Thanks: and for your ongoing support on ATT (i like you linking into the blog comments each week, so feel free to continue to do so!). i enjoyed the link ‘Unsignificant statistics’ — you might enjoy the post ‘most findings are false‘ on the normal deviate blog.

  3. I’m curious about how people forecast the cash rate. Do you (interest rate forecasters) put less weight on economic data and more on qualitative data? It appears to me the process around setting interest rates is very political (given the board membership) so while the economic data is important for setting the general tone the actual decision is influenced by non-economic forces. Has anyone tried to include this in models?

      1. i use models for medium term forecasts, and try and use my judgement and what i know / hear / think about the board to gauge the month to month stuff. I have had no success modelling the month to month qualitative stuff: that’s why i think it’s good to listen to the journalists.

      2. all I meant was that the decision is made more by group consensus and less so by data. The board membership can drastically change the tone of discussion. It its not too far a stretch to suggest that individual members (non-bank ones) will protect their interests. Thats all I meant by political.

        1. Ah! thought you meant political party influence….

          I reckon the Governor always decides in the end (like in the US it’s the Chairman). I can’t imagine a majority ever overruling his vote. And I think he is basing his decisions exclusively on economic factors. It’s a pity individual votes are not published in Australia.

          Regarding month to month, it does not matter anyway, the medium term path is more important for my investment decisions. For instance I think rates will go lower this year, but which month exactly who knows. It depends on too many factors that are not known until the very day before the meeting anyway, especially right now where every meeting is “live”.

          1. Its not only the board members but the general chatter and the climate this sets. Yeah the Governor may have the final word but he is often put under extreme pressure by the various sectors that have representation on the board and the bigger factor…the press. For me this influences the medium term outlook and it is not picked up by various pieces of data. Why else would it be so difficult to forecast interest rates…if it was all up to the data it should be easy…either that or economics as a field is equivalent to medieval medicine.

          2. Yeah, the difficulty is that the economic data we have is far from optimal, often imprecise, with large margin of errors and also incomplete. Add to that, that even if we had great real-time data, forecasting is VERY hard, since markets do move in unforeseen ways. Collective human behavior is still a mystery! For instance I am sure that in July, if the AUD is back above parity or if the ASX 200 is at 4400, then a cut is a sure thing. We won’t know that until the very last day.

            This is an interesting article on this topic I think:


            Still monetary policy is determined by a few RBA economists which we trust are making the right decisions, but it’s far from an exact science. The GFC itself is the indisputable prove of it.

            I admit myself I find the whole system pretty much rubbish, but probably the best we have invented so far. I mean lowering rates to have people take on more debt, and then once they have done that, rising rates if they are going too fast and in the process bankrupt a few of them. The whole system seems to be always feeding on itself, in good times it becomes uncontrollably hot, more credit attracts even more credit, etc, while in bad times the opposite becomes true and the whole system become excessively depressed. This seems to be an issue caused by fractional reserve banking where money is being created and destroyed too easily and too fast.

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