Will RBA cut rates next week?
01:00, 30 januari 2015
· Av CMC Markets
Over the past week or so we’ve seen the Australian dollar slide sharply on the back of an article from an Australian journalist, with connections to the central bank that suggests that we could see a rate cut at the next RBA meeting which is set to take place in the first week of February.
The article also contains detailed observations about the RBA’s future thinking with respect to the direction of the Australian economy, which if accurate, raise significant concerns about the RBA’s communication policy.
The current headline rate sits at 2.5% and has been sitting there for nearly 18 months and at various points during that time the central bank has voiced its concerns about the level of the exchange rate, particularly when it was trading at and around parity with the US dollar.
With central banks around the world competing in a race to the bottom in a rate cutting cycle it would be tempting for the RBA to buy into that narrative, particularly since the current CPI inflation rate is already running below the central banks inflation target of between 2% and 3% at 1.7%.
There is no doubt that the RBA has room on the downside to reduce rates further, but it’s also important to remember that the reason inflation is declining so rapidly is because of the rapid decline in commodity prices to which the Australian economy is particularly exposed, though lower oil prices will also help mitigate this at the consumer level as it becomes cheaper to fill up your car, freeing up more cash for consumer discretionary items.
It’s also important to remember that the fall in the exchange rate can be inflationary itself and we’ve already seen a 15% fall against the US dollar since the summer, which could well filter through into the economy, at some point in the coming months.
Most central banks tend to look past transitory effects like falling commodity prices and in this context there is a concern that markets could be heading for a fall in betting on a rate cut next week.
With interest rates already at record lows and house prices in some parts of Australia at elevated levels, does the RBA really need to reduce interest rates further, when GDP is already running at an annualised 2.7%, and mean prices are trending at 2.2%.
The larger question though in light of the moves in the last week or so goes to central bank monetary policy and communication policies of central banks in general.
We already know from bitter experience this month how a lack of transparency, communication or outright dishonesty, whatever you want to call it, on the part of a central bank can damage that central bank’s credibility, after the Swiss National Bank unexpectedly removed its peg to the euro three days after saying it was a key pillar of its monetary policy.
Now we have the prospect of an RBA rate cut next week with the market forewarned by a journalist who appears to know a significant amount of detail about significant changes to the outlook for the Australian economy, well before the meeting has taken place.
This style of communication would appear to be going from one extreme to the other and brings into question the RBA’s credibility and communication policy, given Steven’s comments in December that a “period of stability” remained the best policy.
Central bank credibility is already running pretty thin at the moment and the best thing that can happen next week is for the RBA to do nothing, while communicating their concerns about the economy, updating their forecasts to reflect the changing environment, and being prepared to act if needs be in March or April.
A rate cut at this point could well be merited on the basis of concerns about a slowdown in China and the global economic outlook, as well as the recent changes in central bank policy around the world, but the least the RBA can do is to communicate their intentions, and changes in thinking in the proper way, and not by way of an Australian newspaper tabloid.
The Australian dollar is currently near its lowest levels since June 2009, trading near to its 200 month MA at 0.7780 as well as the June 2009 lows at 0.7705. A conclusive break through here could well see further losses towards the May 2009 lows at 0.7300, but given it is down nearly 15% since the summer the potential for a short squeeze back to 0 8000, on the back of RBA inaction next week is a distinct possibility, in a “sell the rumour, buy the fact” kind of way.
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