There is an old gag that runs along the lines: “Ask five economists and you’ll get five different answers ? six if one works in Treasury.”
The Reserve Bank (RBA) meeting on Tuesday is more of a binary outcome.
Either there will be a 25-basis-point cut, taking the official cash rate to a new record low of 1.75 per cent, or rates will be left on hold.
That does not mean that you will not get a range of answers down at the Economists’ Club.
To Cut
Tim Toohey from Goldman Sachs:
“The third quarter CPI report was unquestionably weak. We believe the RBA now has little choice but to ease interest rates in November.
“The breadth of inflationary pressures is at a record low and our alternative measures of underlying momentum are weaker still.”
Paul Brennan from Citi:
“The lower-than-expected third quarter inflation provides the opportunity for a rate cut that should enhance confidence and guard against the downside risks from the weaker global backdrop.
Daniel Blake from Morgan Stanley:
“With no obvious risks to the low inflationary outlook, we see a stronger case for the RBA to cut rates on November 3, en route to a 1.5 per cent trough rate in the first half of 2016.
“While we don’t think RBA board deliberations are particularly inflation-centric at present … we retain our out-of-consensus call for a Cup Day cut on the basis that prudential measures are cooling the housing market quickly, with the case only amplified by the sector-wide repricing of mortgage rates this month.”
Paul Bloxham from HSBC:
“The most powerful argument is that inflation is lower than had been expected.
“This tells us that there is more spare capacity in the economy than previously thought.
“Although the recent lift in the activity indicators should mean growth lifts and generates some inflation, the bigger risk is undershooting the inflation target, not overshooting.”
Scott Haslem from UBS:
“We pencilled in a rate cut just two weeks ago, immediately following the first ‘out-of-cycle’ hike by one of the retail banks.
“While we viewed a November rate cut as the path of least regret for the RBA … we saw it as by no means certain.
“This week’s much lower than expected CPI data in addition to the recent dovish tones from global central banks, removes some of that uncertainty.”
Shane Oliver from AMP:
“The case to cut is powerful as a rate cut now will head off already announced big bank mortgage rate hikes and the threat this will pose to consumer spending at a time when economic growth is weak.
“Non-mining investment is poor, the contribution to growth from home construction looks like peaking next year, El Nino related drought risks are posing an additional threat to growth, the terms of trade is still sliding and inflation remains below target.”
Or not to cut
Alex Joiner from Merrill Lynch:
“Growth seems to have stabilised at a below trend rate and the unemployment rate has not materially risen ? this suggests the RBA can hold off on a further cut on these grounds.”
Su-Lin Ong from RBC:
“On balance, we suspect that the RBA will want to gauge the impact to the consumer of recent mortgage rate hikes and may treat the unusually low core inflation readings with some caution.”
Stephen Walters from JP Morgan:
“The decision has become unusually complicated. Board members must balance what seem to us like constructive developments on the domestic economy recently, against the contractionary impact of recent out-of-cycle mortgage rate hikes by the Aussie banks, and the messages from inflation data, which were loud, but not necessarily clear.”
Klaus Baader from Societe Generale:
“We believe that these [higher mortgage rates and lower inflation] are not sufficiently powerful to tip the balance in favour of an even lower cash rate from levels that are already at an all-time low.
“The key argument against a cut is the risk to financial stability.”
Bill Evans from Westpac:
“The surprise drop in the inflation measure is not unique and, in the past, the bank has looked through a one-off number.
“The motivation for cutting next week would be a significant downward revision to the growth outlook.
“The data flow and the RBA’s recent commentary does not point to such an event.”
50/50 bet
The market is not so sure, either, and as of close of business on Friday evening it priced in about a 50/50 ? or in Cup Day parlance an “even money” ? bet on a cut.
Before last week’s low inflation data, a cut was rated at only a 30 per cent chance.
The RBA will also publish its quarterly Statement on Monetary Policy on Friday, which should provide an insight into the RBA’s view of the future.
There may well be some changes to key RBA forecasts, with inflation likely to be trimmed in the short term but the bigger question is whether GDP will be cut as well.
UBS’s Scott Haslem said while he did not expect the RBA would lower the immediate growth outlook, a truer “dovish” signal would be if there were cuts to the end of 2016 and 2017 growth and inflation forecasts.
Source: ABC News
