History suggests RBA will sit still next week: HSBC's Paul Bloxham
History tells us that the RBA tends to prefer to hold steady for long periods, rather than fine-tune, so at least one leading economist thinks that history will repeat and that RBA will choose to sit still next week.
It’s the rate prediction of former RBA insider and now HSBC Bank Australia economist Paul Bloxham.
“It’s a close call – a case could be made for either sitting still or cutting rates next week, depending on the RBA’s forecasts and how they view the balance of risks,” he says.
Suggesting fine-tuning is not RBA style, Bloxham says: “Up by the stairs, down by the elevator! That’s the way monetary policy is set in Australia.
“This asymmetric approach to setting rates partly reflects the way the economy evolves.
“In an upswing the RBA is seeking to gradually lean against rising demand to keep it growing in line with supply, thereby keeping inflation contained.
“A downturn tends to be a much more sudden event. A negative shock – often from abroad – convinces the RBA that its rate setting is too high and it cuts sharply to support the economy.
“A downward tweak to rates of 25bps next Tuesday – as markets are pricing and 12 of 20 economists are currently calling for – is somewhat anachronistic,” Bloxham says.
“In our view, past behaviour suggests they are more likely to sit still than cut.
“History would suggest that they would wait until they are certain that they need to cut and then go more aggressively than 25bps.
“As yet, we do not think the evidence stacks up for a downswing in the cycle,” he says.
“We think their forecasts will still show underlying inflation rising from here (albeit now within the target band) reflecting the massive mining boom and weak productivity growth.
“With policy likely to be set on this central forecast, we expect them to hold next week.
“But policy could be set on the balance of risks, as there are clear downside risks to the global outlook,” Bloxham says.
“As the deputy governor reminded us this week, the IMF has suggested the world economy has ‘entered a dangerous new phase’.
“But as he also pointed out: it may still be too early to tell what this means for Australia.
“We think so too,” he notes.
