The handful of economists predicting a rate cut next week are showing diminished confidence in their calls...
(Bloomberg) -- The handful of economists predicting a rate cut next week are showing diminished confidence in their calls. Their first hurdle is third-quarter inflation data due Wednesday, which they need to come in around 0.3 percent or lower.
Most of the forecasts for a Nov. 1 easing were made before the Reserve Bank of Australia’s new governor took the helm last month. Philip Lowe has since elevated financial stability’s importance in the making of monetary policy and stressed he and his colleagues aren’t “inflation nutters”: In other words, he signaled no mechanical cut in response to weak consumer prices.
Instead, Lowe indicated an easing would require a deterioration in economic growth and unemployment. But with headline rates of 3.3 percent and 5.6 percent respectively -- even though that probably overstates their strength -- the economy and labor market don’t provide a trigger. Meanwhile, a record-low cash rate of 1.5 percent has spurred renewed momentum in the Sydney and Melbourne housing markets, raising a red flag on asset-price imbalances.
“The RBA does appear to be looking for reasons not to cut rates,” said Michael Blythe, chief economist at Commonwealth Bank of Australia, and one of the six among 26 surveyed by Bloomberg who predicts an easing on Tuesday. “It really does seem to come down to inflation having to be low enough to kind of drag them over the line again in November.”
Citigroup Inc. also forecasts a rate cut, saying that CPI “may need to be surprisingly low” for that to happen. In other words, the dissenting economists need an inflation shock; the only other factor going their way is that when the central bank released its updated growth and inflation forecasts in August, they were premised on another rate cut.
Both Citigroup and Commonwealth Bank say that quarterly inflation needs to be 0.3 percent or lower Wednesday to spur a rate cut.
The median estimate in Bloomberg’s survey is for a 0.5 percent increase from the previous three months and 1.1 percent from a year earlier. The RBA, which reduced rates by 25 basis points after the first- and second-quarter inflation readings, targets CPI of 2 percent to 3 percent on average. Traders are pricing in a 15 percent chance of a November cut.
“I think inflation slowly edges higher from here,” Blythe acknowledged. “But that’s not to say it’s going to come charging back by any means.”
Most of the forecasts for a Nov. 1 easing were made before the Reserve Bank of Australia’s new governor took the helm last month. Philip Lowe has since elevated financial stability’s importance in the making of monetary policy and stressed he and his colleagues aren’t “inflation nutters”: In other words, he signaled no mechanical cut in response to weak consumer prices.
Instead, Lowe indicated an easing would require a deterioration in economic growth and unemployment. But with headline rates of 3.3 percent and 5.6 percent respectively -- even though that probably overstates their strength -- the economy and labor market don’t provide a trigger. Meanwhile, a record-low cash rate of 1.5 percent has spurred renewed momentum in the Sydney and Melbourne housing markets, raising a red flag on asset-price imbalances.
“The RBA does appear to be looking for reasons not to cut rates,” said Michael Blythe, chief economist at Commonwealth Bank of Australia, and one of the six among 26 surveyed by Bloomberg who predicts an easing on Tuesday. “It really does seem to come down to inflation having to be low enough to kind of drag them over the line again in November.”
Citigroup Inc. also forecasts a rate cut, saying that CPI “may need to be surprisingly low” for that to happen. In other words, the dissenting economists need an inflation shock; the only other factor going their way is that when the central bank released its updated growth and inflation forecasts in August, they were premised on another rate cut.
Both Citigroup and Commonwealth Bank say that quarterly inflation needs to be 0.3 percent or lower Wednesday to spur a rate cut.
The median estimate in Bloomberg’s survey is for a 0.5 percent increase from the previous three months and 1.1 percent from a year earlier. The RBA, which reduced rates by 25 basis points after the first- and second-quarter inflation readings, targets CPI of 2 percent to 3 percent on average. Traders are pricing in a 15 percent chance of a November cut.
“I think inflation slowly edges higher from here,” Blythe acknowledged. “But that’s not to say it’s going to come charging back by any means.”
