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Rate cut not a sure bet

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Economists backing a rate cut

A majority of economists are tipping a Cup day interest rate cut. BusinessDay's Chris Zappone reports.

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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

35 comments

  • With opinion polls running at 50/50 for the next election, Glenn will want to do everything he can to give the government a leg up. This present government signed off on his $1M salary, and the Liberals won't have forgotten his Labor friendly tightening stunt during the 2007 election. With a corruption scandal hovering, Glenn will need to do his best to make sure that he is not fired by an incoming Liberal government. That means cutting rates.

    Commenter
    Butch
    Date and time
    November 05, 2012, 2:06PM
    • Wow.....conspiracy theories abound today. Labor is controlling the SMH,Treasury & now they are controlling the RBA. Who would have thought?????

      Commenter
      Bazza
      Date and time
      November 05, 2012, 2:41PM
    • Rates will be brought in line with the rest of the world (to 0% it is) - it is as sure as there will be dawn tomorrow. Economy no longer can sustain high dollar and expensive capital.

      There are few reasons why they are not there yet.

      First - it is howl from share market zombies every time rates go down - as capital gets deinvested from share market and gets invested into property.

      Second - it is howl from so called "savers" (read - people who do nothing and live on interest from the inheritance they got.)

      It is RBA's version of "democracy" - "majority" of fleas living on the dog rule the dog.

      Commenter
      dinkumnet
      Location
      dinkumnet.com
      Date and time
      November 05, 2012, 2:57PM
    • The fact that Stevens tightened rates one month before the 2007 elections proves that we may not actually have an independent reserve bank after all.The only reason to delay cuts is to do the same again ie to reduce the rates next year when Gillard decides on an early Poll.This may have the psychological impact on the swinging voters to get Labor across the line again.On the other hand int rates cut take time to have the desired impact on the economy and Steven will be actually helping his mates if he decides to cut now.
      However Stevens may not really care as his term is expiring in Sept 2013.
      In my opinion int rates have stayed too high for too long due to the series of mistakes made by RBA in relation to their forecasting and double standards in relation to using underlying statistics whenever it chooses to do so or whenever it suits them and no one can question them as they are deemed to be independent .If inflation is the reason for not cutting rates now then this will be a contradiction as they had previously stated that they would look through the impact of carbon tax as they did with GST. The problem we have got is that we have an inept Fed Govt as well as an inept RBA therefore the blind leading the blind.The only way we can get the consumer confidence back is to cut the rates and keep them down and not jump at inflation shadows as they have previously done.There are too many crosswind to be able to properly gauge inflation .Inflation is actually is better then deflation.
      On another note history has shown that decreasing house prices always results in a change in govt.

      Commenter
      NO CONFIDENCE
      Location
      CASTLE HILL
      Date and time
      November 05, 2012, 3:07PM
    • Hi dinkumnet..

      love your analysis.... so balanced..

      punish the evil savers and reward the saintly debtors (property investors)

      Commenter
      tim
      Location
      adelaide
      Date and time
      November 05, 2012, 3:33PM
    • As stated last week ....... interests rates to stay the same.

      Expect to see a drop in December.

      Commenter
      J. Fraser
      Location
      Queensland
      Date and time
      November 05, 2012, 3:42PM
    • Any evidence you'd care to share to support that comment? Otherwise i think we can safely discount it as partisan or ideological claptrap.

      Commenter
      Harry
      Location
      Churchill
      Date and time
      November 05, 2012, 3:44PM
    • J Fraser is on the money, it goes cut then no cut. This is one of the easiest things to get on at the bookies tmrw!

      Commenter
      elloco
      Date and time
      November 05, 2012, 4:39PM
    • Tim | Adelaide - that's a good way of putting it, "evil savers and saintly property investors", if everyone was a property investor we would have a more responsible society, maybe it's time to put the GST on rent, then Swanny could have his surplus, and interest rates can go down some more. Paying rent and saving in cash is like gambling, needs to be discouraged. GST is already charged on trailer trash and hotel dwellers, why not everyone else. More GST please Mr. Abbott, and tax those vacant houses and "landbank" properties too.

      Commenter
      bg
      Date and time
      November 05, 2012, 5:33PM
  • Remember Howard spruiking that interest rates would always be lower under a Coalition government!!!...BZZZZZ Sorry Johnny but interest rates are now lower under a LABOR government and getting lower!!!..This is BRILLIANT news for investors!!..Also i heard that Abbotts policies will cost business's billions of dollars in costs,even if he scraps the Carbon Price..not a good look for the future under a destructive Abbott Coalission Train wreck.

    Commenter
    Toxic Tony
    Date and time
    November 05, 2012, 2:41PM

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