May RBA cash rate decision “on a knife edge” and “live”: economic writers

The 21 out of 29 economists, polled by Bloomberg last week, who expect the RBA to leave the cash rate on hold tomorrow, could be wrong.

According to News Limited business commentator Terry McCrann, despite the weight of the Bloomberg poll, the decision whether to cut the cash rate to a pre-GFC low of 2.75% or keep it unchanged at 3% for the fourth successive monetary policy meeting is “balanced on a knife edge”.

Similarly, the Australian Financial Review’s Chris Joye says the RBA meeting on Tuesday is “live” with a rate cut a distinct possibility while economist and Business Spectator commentator Stephen Koukoulas says the case for a rate cut is “overwhelming”.

Were the RBA to cut the cash to 2.75%, it would be its lowest setting in 53 years with proxy historical RBA data going back to 1959 showing the previous low being 2.89% in January 1960.

McCrann bases his assertion on a “mix of conflicting and confusing signals” he says the RBA is receiving on both the domestic and global economy.

Globally, he mentions the record highs achieved on Wall Street and on the German stock market contrasted by the weaker end to the week for the ASX.

However, adding to the confusion McCrann says, the European Commission now expects a deeper recession for that the eurozone economy, forecast to fall 0.4% in 2013 compared with previous expectations of a 0.3% fall.

“Europe is sick, sick, sick, but its sharemarket are booming,” he writes.

Adding to the anomaly, Australia’s economy is the “envy of the world” but its sharemarket is struggling.

While McCrann has higher hopes for the US economy on the back of cheaper oil discoveries, he expects things to end badly in Europe.

He also highlights the anomaly in the performance of Australia's major banks, now among the biggest in the world and with profits to match – as seen in the results posted by ANZ and Westpac last week, while lending remains subdued.

But, while bank share prices are surging, the big banks are finding it hard to grow their lending because of cautious consumers and property investors and business sector ‘that lacks confidence” relying instead on cutting costs and reducing bad debts.

The Australian Financial Review’s Chris Joye says the RBA meeting on Tuesday is "live" with financial markets pricing in a 56% chance of an easing in the cash rate.

He says there could be “tactical merits” for a "dovish" RBA board to cut the cash rate ahead of the Federal Budget announcement on May 14 thus “avoiding a messy election debate about whether the bank has passed judgment on Labor’s prudence”.

Apart from a political motivation, Joye says benign underlying inflation readings “give it more room to buttress growth without fuelling price pressures”.

Like McCrann, Joye also points out the confusing signals the RBA board must wade through noting that it has already revealed in previous statements that it is having “great difficulty working out what is happening to the economy now and, remarkably, in the recent past.

He says the RBA’s "army" of 260 analysts can’t reliably predict inflation, growth or jobs.

Joye also highlights that futures traders are better predictors of rate cuts than economists mentioning that research by Barclays economist Kieran Davies shows that “predictions of the cash rate one year out from Sydney Futures Exchange contracts beat consensus economist estimates 60% of the time.

Stephen Koukoulas began tweeting last week about the need to cut the cash rate after the disappointing building approval figures and argues in his latest Business Spectator column that the case for a rate cut is now “overwhelming”.

He accepts that he and the RBA got it wrong previously that “earlier interest rate cuts were percolating through the economy” with the central bank now close to missing its inflation target at the lower end of its 2% to 3% range, the Australian dollar remaining high, house prices edging lower in April, a gentle rise in the unemployment rate and a dip in business operating conditions among the factors in favour of a cash rate cut.

“These risks can be reduced with a prudent rate cut tomorrow,” he says.

Others are more certain about rates remaining on hold, but acknowledge a close decision.

“We think that the RBA will leave rates unchanged in a close decision, with June still our preferred timing for the next rate cut given a plethora of economic updates, including for business investment intentions, will then be available,” ANZ in its morning note today.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer


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