RATE CUT NOT COMING OUR DIRECTION IN MAY

THE very low inflation numbers open the door to an official interest rate cut. The Reserve Bank will not walk through it at its next meeting on Tuesday week.

The CPI numbers sent the economentariat into an impressive frenzy of premature expectation.

The economists, almost all already gathered on the ‘rate cut’ side of the ship, were verbally clambering over each other to be the first to ‘dive overboard’ with a May cut prediction. Or at least, not to let the trading day end without having so predicted.

We sat in the office counting them as they appeared on our screens. One, two, then four and five. There were assuredly more. Even the normally sensible Annette Beacher of TD Securities, sitting in Singapore, joined the stampede.

Under a headline that the CPI was a “game changer (correct, which I will come back to) for this hawk”, Beacher said: “We now look for minus 25bp on 7 May”.

She remained sufficiently ‘hawkish’ to not follow many of her peers into predicting a second cut would follow immediately at the June meeting.

Even former Reserve Banker and the ‘hawk of hawks’ Paul Bloxham made it semi-unanimous by dropping his previous prediction of two rate hikes in 2020.

Bloxham now says the RBA will stay at its 1.5 per cent all the way through this year and next – that leaves him as still the ‘hawk of hawks’ and maybe even the only ‘hawk’.

But even Bloxham, even Bloxham – who had stuck resolutely to predicting ‘return-to-normal’ rate hikes, month after month since former governor Glenn Stevens took the official rate down to 1.5 per cent all the way back in August 2016, through weak GDP and inflation data – has now added there was a “rising risk of a rate cut”.

The most astonishing feature of the latest frenzy, which really got started a week ago with the release of the minutes of the last RBA meeting, is that it comes over an all-but explicit denial by a rather informed person of any immediate rate cut.

That person is none other than the deputy governor Guy Debelle.

Speaking publicly – to stress, ‘on the record’ – two weeks ago Debelle said, and I quote from the opening paragraph in the AFR, that decent economic growth over the next few months would be enough to prevent the bank from having to cut official rates.

Critically, Debelle stressed that the RBA expected that we would see that decent economic growth and so, and this is a direct quote, “we won’t have to get to that point (of cutting).’’

Yet a week later, when the frenzy started to build after the release of the minutes of the last RBA meeting, Debelle was rendered a central banking version of a ‘non-person’ from the old USSR.

Aha, the economentariat chorused almost in unison: the RBA was thinking about a rate cut at its last meeting – or at least, wink-wink, nudge-nudge, building up to one if not in May certainly in the next few months.

Yet not a single mention that I could see was made of Debelle’s comments – comments that had come, critically, after the meeting of which the minutes were a record.

Further, hiding in plain sights were the words in the minutes that sparked the frenzy: that the RBA had discussed “the scenario (my emphasis) where inflation did not move any higher and unemployment trended up.”

Then (my emphasis again) a cut in the cash rate would be appropriate, said the minutes.

To – necessarily – explain the bleeding obvious to the economentariat: yes, the first part of that scenario was confirmed yesterday.

But not the second part. As the jobless numbers last week showed that far from unemployment ‘trending up’, jobs growth remains very healthy.

So there won’t be a cut in two weeks – not unless, the qualification we always have to include, we get hit by some left-field catastrophe.

Or – and this is more nuanced – the RBA became anecdotally aware of a sudden and really serious implosion in the jobs market. That though, is very, very remote.

But there will be a change in RBA Governor Philip Lowe’s rhetoric.

We will see a much more explicit statement that inflation is too low at sub-1.5 per cent.

And further, that the prospect of returning seamlessly or within a reasonable time to even the 2 per cent bottom end of the RBA’s 2-3 per cent target, far less its 2.5 per cent midpoint, is remote.

Therefore any sign of a deteroriation in the jobs market would prompt immediate action on rates.

And in those circumstances, I doubt that it would ‘only’ be one or two 25 point cuts.

PAUL BLOXHAM NOW SAYS THE RBA WILL STAY AT ITS 1.5 PER CENT ALL THE WAY THROUGH THIS YEAR AND NEXT