Economists across the spectrum have rejected the possibility of an interest rate cut at tomorrow’s RBA meeting, saying the central bank will retain its neutral approach until the likelihood of a double-dip global recession becomes clear.
Speculation of a 25 basis point slice to 4.25% was sparked by a news story on Friday by Australian economics columnist David Uren that claimed (in the headline, which Uren probably didn’t write) that the Reserve Bank board was “odds on” to cut when it converges on Sydney for its monthly meeting. The Shitstorm author followed up with another bearish piece today citing increased wholesale funding costs and rampant instability in the US to add to last week’s disappointing retail sales and consumer confidence figures.
But markets are only pricing in a 10% chance of a negative movement tomorrow, and providing the Continent doesn’t completely fall off a cliff the general bias is likely to remain neutral for at least the rest of the year. Official inflation figures due out at the end of the month could also provide some more clues to the extent of Australia’s resilience.
Meanwhile, there’s some preliminary evidence this morning that the dreaded inflation bogeyman could be about to re-emerge. The TD Securities gauge showed prices increased 0.3% from May to June, and are running at an annual pace of 3.6%, outside the RBA’s target band of 2-3%.
Crikey asked a group of leading economic hard heads to speculate on what might be running through Glenn Stevens’ mind as he weighs whether to sharpen the knife or keep rates at 4.5% for the second month in a row.
Adam Carr, senior economist, ICAP: I think a rate cut is a ridiculous proposition. We’ve got an unemployment rate of 5.2% and there’s no metric any sensible person could use to justify a rate cut. Inflation is outside the target band — I’ve got a mortgage but clearly the sensible thing is to hold off. If inflation accelerated they’d have to hike. Just because sentiment has collapsed in Europe doesn’t necessarily mean much. It wasn’t that long ago that we were heading to a v-shaped recovery and the fundamentals haven’t really changed. Prediction: hold
Damien Boey, senior economist, Credit Suisse: I don’t think they’re going to do anything, the market is only pricing in a 10% chance of 25 basis point cut. Personally, I don’t think markets are going anywhere — the RBA is going to be disappointed when it comes to growth. Despite the most recent prediction being 3-4% we’re probably not going to get that at all. But that doesn’t mean there’s a need for the RBA to cut rates. You would really have to see things going badly wrong, for China to collapse or another sovereign debt crisis in Europe. The reason for not cutting is that the bank wants to contain asset prices and leverage — if they were to cut rates that might create a new housing bubble. Prediction: hold
John Quiggin, University of Queensland: I guess that the people calling for a cut are right in one sense in that the outlook for the global economy has deteriorated quite a bit and so the assumption is that it’s time to return interest rates to a normal level. But I’d be very surprised at a cut. The domestic economy remains very strong and that’s where the RBA’s focus has been. I think the bank would want to wait for at least another month to say how things pan out. Prediction: hold
Sally Auld, interest rates strategist, JP Morgan: I don’t think a cut is a possibility unless something extraordinarily negative happens overnight. While there has been some solid expectations of slowing global growth, there’s really nothing to indicate anything more sinister like a double dip recession. The RBA is nicely placed in a neutral policy sense and will see what plays out over the next few months. We’ll be waiting the next set of inflation numbers before revising our outlook. Prediction: hold
University of Western Sydney economist Steve Keen (from the Saigon 48 restaurant on 48th Street in Manhattan): I called this earlier in the year and said that the RBA was going to start cutting. I thought that we weren’t out of the woods yet, and now the bank have realised “holy shit”, we’ve got it wrong and we’ve been going in the wrong direction. I don’t think they’ll cut tomorrow, but if they do it confirms the same old story about too much private debt. Now that they’ve been forced into a possible retreat, it’s a sign they don’t know what they’re doing. Prediction: hold