RESERVE BANK IS NOT PLANNING A RATE CUT

THE Reserve Bank did not weigh an interest rate cut at its last policy meeting – as one online headline had it yesterday after the release of the minutes of that mereting.

Understanding this is fundamental to understanding the RBA’s thinking – and the, true complicated, state of the economy, which is really what it is all about.

All about, crucially, not only in determining whether or not and when the RBA might cut – or indeed, hike; but in the ‘what’s it all about, Alfie?’ sense. That’s to say what the RBA is actually trying to achieve: simply, a strong economy with not too-high but also not too-low inflation.

More immediately, it’s to caution against extrapolating from the RBA “weighed a cut in April “to assuming it would cut in May or all-but announce a cut for June after the election.

Let me make three things categorically clear.

First, there is zero chance of a rate cut at the next meeting in two weeks. It would take a shock global cataclysm to alter that – or truly catastrophic jobs figures tomorrow.

Secondly, the RBA was not trying to either ‘talk itself’ into a rate cut or even into seriously considering a rate cut, or trying to winkwink, nudge-nudge hint that is where it was headed.

Arguably, the most astute observer among the economentariat – with as I have noted before, the best recent record among his peers of RBA rate prediction – Westpac’s Bill Evans went close to falling into this latter trap yesterday.

No, I should emphasize, he did not predict an early cut; what he did do, was to draw support from the minutes for his existing prediction of a cut in August and a second cut in November.

And I quote Evans: the minutes “clearly indicate that they are willing to cut the cash rate”.

Well, as former president Bill Clinton famously said about another word, it depends what you mean by the word “willing”.

If you think it means that the RBA is anxious to cut and will seize the first excuse or opportunity: the answer is that it is ‘not willing’.

If you think that it means the RBA is willing to cut if the evidence demands that it cut, then, yes, ‘it’s willing’.

But that’s the first of three critical points. First, none of this is the slightest bit new. RBA governor Philip Lowe has made that crystal clear.

The second key point, though, is that the willingness to cut is still balanced by a similar willingness to hike.

The RBA has said this repeatedly since February: as for example this from Lowe: “the probability that the next move is up and the probability that it is down are more evenly balanced”.

It is critically important to understand the RBA has not surreptitiously removed the second part of that statement from its thinking. And certainly not, winkwink, nudge-nudge style in yesterday’s minutes.

Indeed, and this is the absolutely critical third point, the RBA believes – absent that global left-field shock – there is little prospect of a rate move, either way, for the next few months at least.

This also goes to the ‘third thing’ I wanted to make clear: this has got nothing to do with the election.

Lowe hasn’t ‘put away his rate cue’ for the duration of the election campaign. He’s not waiting for the election to be over so that he can cut at the June meeting.

But again, I have to keep stressing these points: the RBA is always ‘willing’ to pivot and pivot very quickly on a dime if conditions change and even more if its perception of what policy needs to and can do changes.

Thus it would be ‘willing’ to cut in June (or, much less likely, hike) if needs must. Indeed, it would be entirely ‘willing’ to cut in May, in two weeks, if its perceptions change between now and then, election or no election.

You don’t have to believe me on all this; no less a person that Lowe’s deputy Guy Debelle said it very publicly just last week – after, it’s worth noting, the meeting whose minutes got some people all excited yesterday.

Debelle said the RBA’s expectation was that we would see decent growth in the economy and so “won’t have to get to that point” (of cutting).

The key to any change in that expectation is jobs and jobless data, making tomorrow’s release rather important.

Again, hiding in plain sight were the words that sparked all the excitement yesterday: the members discussed the “scenario (my emphasis) where inflation did not move any higher and unemployment trended up.”

We would need – these are my words – to see that jobless rate go sharply above 5 per cent.

Then, as the minutes noted, “a decrease in the cash rate would likely be appropriate in these circumstances.”

They discussed a scenario not expected reality. But again, if the scenario became reality – Debelle and the RBA think it unlikely – a rate cut would follow.