Monday, December 05, 2011

Will the Reserve Bank cut rates tomorrow? I doubt even it knows

Meantime Chris Joye says he found this video of a pre-meeting chat.

Participants: someone like Assistant Governor Phil Lowe, someone like senior board member Roger Corbett:

My take:

Reserve Bank specialists are in the dark about whether the Bank will cut interest rates at its final meeting for the year tomorrow with some believing even the board members themselves are uncertain.

Tomorrow’s meeting comes ahead of economic growth figures Wednesday likely to be very strong as Queensland rebounds from the floods but amid uncertainty over events in Europe and the knowledge there isn’t another board meeting scheduled until February.

“Waiting two months until the next board meeting is too big a risk to take given the deteriorating situation in Europe,” says AMP head of investment strategy Shane Oliver who is genuinely uncertain. “While recent better than expected data in Australia - notably for business investment - make it a close call, the Bank’s policy of ‘least regret’ would argue strongly in favour of a precautionary rate cut.”

Commonwealth securities chief economist Craig James thinks on balance the Bank will hold off until February for “tactical” reasons.

“If it waits until February the European situation might get resolved one way or another. I think it will hold off, but I don’t hold this view with supreme confidence” he says, adding that if he was on the board he would cut straight away.

Missing from almost all the commentary about tomorrow’s meeting is the serious suggestion the past week’s mid-year economic statement and the projected narrow 2012-12 budget surplus will have anything to do with it...

The Bank has for some time acknowledged in board minutes that tighter fiscal policy is having a contractionary effect on the economy. It cut rates in November because underlying inflation had fallen back to around 2.5 per cent, the centre of its target band and the long-term average.

The Melbourne Cup day cash rate rate cut moved the overall structure of rates towards but not all the way to their 15-year average, leaving the Bank room for just one more cut which it could justify as being in line with its inflation target. The question facing the board is whether to make that cut this week or wait until February. It is possible that the board has before it an open recommendation and possible also that it will amend whatever recommendation was emailed to members in the staff briefing pack late last week.

Seasoned Reserve Bank watcher Chris Caton of BT Financial Group said the decision could go either way.

“They don’t want to look like they are panicking, but on the other hand given that the rest of the world took substantive liquidity enhancing measures to support European economies last week the Reserve Bank might want to say well they are part of that club.”

“The Australian data can be read two ways. In the past week we have had very very strong capital expenditure numbers and very weak residential building approvals. I don’t know what it should do. Obviously it is going to cut rates again, the only question is is whether it is Tuesday or in February.”

September quarter national accounts released Wednesday are expected to show impressive economic growth of around 1 per cent for the second successive quarter, in part because of rebuilding activity in Queensland.

Although annualised growth over the past six months will exceed 4 per cent, the negative March quarter should knock down annual growth to less than 3 per cent.

Polls show market economists evenly split on the Reserve Bank’s decision tomorrow. Futures traders are more confident with the latest pricing implying a 96 per cent probability of a cut in the cash to 4.50 per cent.

Published in today's SMH and Age

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