By Michael McCarthy, Chief Market Strategist, CMC Markets Australia The calls for an interest rate cut next week are louder than the cicadas of high summer. Once the various vested interests, such as housing market participants and bricks and mortar retailers, are discounted, there is still a hard core of respected economists and analysts chirping the rate cut song. In my view, they’ll be disappointed next Tuesday. There are some factors in favour of a cut. GDP growth at the last reading (Q3 2104) stood at 2.7% pa, a level that the RBA considers “below trend”. Inflation is trending downward, and the consensus forecast is for a further fall in core readings to 2.1 or 2.2% this week – at the bottom of the RBA’s preferred 2-3% band, giving it room to move if it wishes. Manufacturing data is weak, and confidence is either mildly positive or mildly negative, depending on the survey. Jobs The major driver of most cut calls is a forecast rise in unemployment. Many expect it to reach 6.5% by mid-2015. However, these forecasts fly in the face of the two most recent monthly reads. In November and December 80,000 net new jobs were created, driving the unemployment rate down to 6.1% and the participation rate up. Unless January’s read reverses this short term trend, reaching 6.5% by June will look more and more difficult, removing this central reason for lower interest rates. Building approvals Intended construction data, an important leading indicator, is also running against the “doves”. October and November building approvals both increased month on month, directly against consensus calls for falls. The annualised rate of increase stands at 10.1% – hardly a weak lead. Stimulus – oil and the ECB There are also external stimuli that could boost the Australian economy. Lower oil prices mean lower petrol prices, giving consumers more to spend elsewhere. The European Central Bank will start injecting Euros into the global monetary system in March, and authorities in Japan are widely believed to be considering further policy initiatives. Europe and Japan are two of Australia’s top four trading partners, along with China and the USA, where growth prospects are much rosier. On the face of it, and given a significantly lower AUD already, Australia’s trade prospects look a lot brighter. Surprise and Signalling Perhaps the most important reasons to think the RBA will not move next week are cultural. RBA Governor Glenn Stevens has fostered an unprecedented level of central bank transparency. In this environment, the regularly inserted phrase “an extended period of interest rate stability” deserves to be taken seriously. While the SNB, RBI and BoC have all surprised markets in the last two weeks, for the RBA to do so would require a cultural 180 degree swing. This doesn’t mean the RBA will never surprise markets again – it’s just that a much more compelling economic case is required. On balance, the Australian economy is “okay”, neither booming nor busting. Various RBA board members have discussed the need for an unleashing of “animal spirits” the creative economic forces that drive growth. Confidence, in business and from consumers, is required. Cutting interest rates would signal that the RBA is worried about the outlook, which would in turn undermine confidence – another reason to expect the RBA board to keep a steady hand on the tiller and leave rates unchanged next week.