So 20 out of 26 economists polled by Bloomberg are backing an interest rate cut by the Reserve Bank tomorrow – but it’s worth remembering that more often than not the favourite doesn’t win the Melbourne Cup.
While there’s a case for trimming the cash rate to 3 per cent tomorrow, it’s short of the compelling argument that was made for last month’s cut in the board minutes.
There’s not the smoking gun that existed on the first Tuesday of October.
In five weeks, the Chinese growth outlook has gone from softer-than-expected to back-on-sustainable-track. Europe is no worse and the fledgling US improvements have held, the economy continuing to expand “at modest pace”.
The RBA’s index of commodity prices fell 3.5 per cent in October to be a little above where it was before the global financial crisis, but the panic over falling iron ore prices has abated.
Meanwhile, the sector that Treasury is depending on to deliver 3 per cent GDP growth next year is showing signs of life. Any number of housing indicators remain soft, but there’s a near consensus that the bottom has been reached and building approvals have been steadily improving.
Last week’s ABS figures showed the building approvals trend series up 5.2 per cent over the previous September, with the September quarter overall doing considerably better than the same period of 2011 and the value of residential building approved rising for the past eight months. It’s not flash and it’s all in apartments, but it is alive and the apartment trend makes sense with our demographics and affordability issues.
Thus there’s not the smoking gun that existed on the first Tuesday of October, when, for all the world’s uncertainties and the “softer growth outlook”, the minutes said the board judged it was appropriate to make monetary policy “a little more accommodative”. Didn’t sound like “all hands to the pumps” at the time and times have improved a little since.
On the other hand, there remain two serious policy wild cards and some of the usual arguments for moving monetary policy don’t hold water.
The first – unmentioned by the minutes – is what happens after Americans make their miserable presidential choice tomorrow. The fiscal cliff threat is real enough with Wall Street’s apparent insouciance put down to a general belief that American politicians, even the Republicans, wouldn’t be quite so stupid as to consciously tip their economy into recession.
A blond joke comes to mind: a fair-haired fella comes home to find his wife in bed with the neighbour, shouts that he won’t put up with it, pulls a gun and puts it to his own head, to the mirth of the couple in bed. “Stop laughing!” he shouts, “you’re getting it next!”
The second – gently referred to twice in the minutes – is Canberra’s fiscal tightening. If Swan pursuit of the surplus is at any price, it will force the RBA’s hand to further support demand. The big euphemism employed by the various ministers discussing the MYEFO update was that the government’s fiscal policy “made room” for the RBA to trim rates – no, sufficient tightening in the current global climate forces the RBA’s hand, inflation permitting. The budget projections don’t work without rate cuts.
And inflation does continue to permit, contrary to some of the knee-jerk commentary over the September quarter CPI. While the inflation count was higher than anticipated, the RBA might have been relieved given that the components of that rise shouldn’t much concern it at this stage, not with the labour market tipped to weaken, population growth rising again, the carbon tax discounted and even some government suggestions of belatedly taming non-carbon electricity price fundamentals.
As for the waffle about trying to get an exchange rate result from trimming rates, ignoring that a great deal of the reason for our strong dollar is what is happening elsewhere, the proof has been in the Aussie’s strength despite the series of rate cuts.
A conversation with an investment banker recently found that solid Australian corporates considering bond issues are finding themselves most welcome in Europe by institutions that six years wouldn’t have bothered to offer them a coffee.
It promises to be another close run race in Martin Place. Underlying it all is the RBA’s warning that it takes a considerable time for monetary policy to stimulate demand – that the cuts we’ve already had are still working their way through the system and haven’t been felt yet.
Thus a compromise might be possible: sit tight but make a quite dovish statement, holding out a promise of more cuts if the government keeps tightening fiscal policy.
We’ll find out soon enough and in more detail on Friday when the bank’s quarterly statement on monetary policy is released. Until 2.30 tomorrow afternoon, it’s just another bet on a day that’s full of them.
Michael Pascoe is a BusinessDay contributing editor