RBA: what a difference a month makes

I do sometimes wonder what the economics community in Australia is up to. Just a month ago only 7 out of 29 in the Bloomberg survey expected rates to be cut to 2.25% from 2.5% (Westpac was the only big domestic bank calling for the cut – well done Bill Evans). And of those who didn’t expect a rate cut in February, almost all expected the next move to be up (albeit not for quite a while).

Well what a difference a rate cut and a month makes. Going into the RBA Board meeting tomorrow, 18 of 29 expect a further rate cut to 2% (including all the big domestic banks except NAB), and those who don’t expect it to happen tomorrow expect it will happen by Q2. So I think that means around 75% of economists in the Bloomberg survey have had a rather dramatic change of view.

So what has changed so dramatically in terms of the fundamentals. I would argue not very much, as I had been of the view that rates were going down again for some time. Unfortunately I was a bit too early, if anything (although as I wasn’t blogging then, I clearly can’t substantiate that!).

Domestic demand has looked awful for two years now, and the much hoped for hand-off from mining investment to consumption and services sector investment has looked increasingly shaky. Add in a much greater deterioration in the terms of trade than most had expected and it leaves Australia in a position of already suffering an (income) recession. Income is weak, the labour market is softening and core inflation is falling.

No doubt the weaker AUD helps to some extent, but just as the RBA have said, 75c is the new 85c (or whatever your previous level was that you thought was consistent with the decline in commodity prices).

So the big news to the economic commentators seems to have been that the RBA woke up to all of this. And to be fair, comments from Stevens in the past that monetary policy had done about as much as it could do might have led one to think that they weren’t keen to loosen policy further. But history has shown that central bankers do not walk away from their responsibilities lightly – and with fiscal policy tightening, the RBA was the only game in town. With some help from APRA to try to cool the housing market, the RBA decided a bit more stimulus might be helpful after all.

It is interesting that Stevens said to Parliament that he thought it was having less of an impact than in the past. Does that mean they have to do even more??

Somewhat perversely perhaps, I’m actually not so sure that they will cut again this tomorrow. In the minutes of the February meeting they discussed whether to go immediately or hold off for a month. Suggesting that they were far from hitting the panic button. I wonder whether that is what it will look like if they do cut again in March. But I think that they might pause to assess the impact of the February decision (if you believe the press, it has already boosted the Sydney housing market into the stratosphere) and then cut again in May, following the Q1 CPI print and alongside the next Statement on Monetary Policy.

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