RBA WILL TAKE IT ONE RATE CUT AT A TIME

WHOA! The Reserve Bank hasn’t even cut its official interest rate once, yet commentators are racing to be first to predict the most cuts in the shortest possible time.

JP Morgan’s Sally Auld has moved to the top of the – for want of a better term – ‘leader’s board’ with the prediction the RBA will deliver four cuts by June next year, taking its official rate down to just 0.5 per cent.

And indeed, she can even see the RBA going lower

than 0.5 per cent. Or as she puts it: “we can’t be definitive that 0.5 percentage points is the effective lower bound for the policy rate in Australia”.

Well yes, as I told you on the Friday before the election, the RBA was

finally going to cut its rate for the first time since August 2016. That cut will be delivered next Tuesday.

It will take the rate down from 1.5 to 1.25 per cent. The big four banks – can’t say the same about the smaller ones – will, broadly, follow with 0.25 per cent cuts to their mortgage rates.

Commentators predicting they might or should cut by more on the basis of the somewhat bigger fall in their overall funding costs, are overly arithmetic and inadequately analytical.

Yes, that might be true of this 25 points; but it wouldn’t be of the next 25 points (if it came). I would assume that no bank would be stupid enough to deliver, say, a 30-point cut after next week – only to have to then under-cut with, say, 15 points at the next RBA rate cut.,

The absolutely basic thing to understand is that next week’s cut is the only

cut the RBA has locked in.

As the late great Robert Holmes a Court used to say: the RBA has “no present intention” of cutting a second time.

Yes, it might broadly think it probably will deliver a second cut. Yes, it can become ‘negative positives’ to the economy and in particular to the secondhand property market and housing and construction sectors.

Plus, we have a series of ‘positive positives’. These include APRA’s easing of the borrowing rules; the ‘five will get your 20’ mortgage deposit help from Canberra for first home buyers, and most immediately impactful of all, the ‘tax splash’ in one hit in July when taxpayers file their returns.

Then add the RBA – and bank – rate cut. This all adds up to one huge boost.

Before all this, the RBA was actually pretty optimistic about the outlook. No, it wasn’t forecasting a boom, but it was predicting economic growth running just below 3 per cent, the jobless rate at 5 per cent, and both inflation and wages picking up pace.

The forecasts had the technical assumption that the RBA would cut its rate twice – but over an extended period that went into 2021. With the first in a week, that provides a lot of time for the second cut. Now while the RBA did also ‘technically assume’ a Labor win, that must have played some underlying influence in its analysis.

Now, of course the RBA could be getting it wrong. As I’ve previously detailed, it ‘got’ the second half of 2018 (over-optimistically) wrong. But to no serious negative cost.

The May kick-up in the jobless rate from 5 to 5.2 per cent does raise the question of whether it is getting the economy wrong now in realtime. It was also the trigger for the coming rate cut.

That makes the next jobless number dramatically important. A further kickup would trigger an immediate follow-up rate cut in July.

But if it went back to

5 per cent, the RBA would sit on its hands and watch the unfolding post-election new reality.