RBA’S TOUGHEST RATE DECISION

ARATE cut at next Tuesday’s Reserve Bank meeting is possible but remains most unlikely.

I have to at least allow for the possibility after my unqualified prediction last week that there would not be a cut – against the all but entire economentariat ratecut consensus – as my comment contained a significant error.

I quoted the Financial Review as having reported RBA deputy governor Guy Debelle had publicly stated earlier this month that decent economic growth over the next few months would be enough to prevent the bank from having to cut official rates.

The Fin did report that, but the report was wrong.

In fact Debelle, who was answering questions after a speech, was referring to the need or the possibility of the RBA embarking on the sort of “money printing” exercises that all three of the world’s major central banks have done: The Fed, the BoJ and the ECB.

Now, just as the suggestion that he had been referring to rates was not the reason for my no-cut prediction, only a contributing factor, the fact that he was not referring to rates doesn’t of itself make a May rate cut more likely.

It’s an unusually complicated situation.

The unique conundrum the RBA has been grappling with is very low inflation combined with sustained very strong jobs growth, and especially strong growth in full-time jobs.

The first might suggest an economy that was struggling, or even heading towards recession – and is supported by relatively sluggish consumer spending, the biggest component of the economy, and which fed into those weak December quarter GDP numbers.

Plus the slump in the property market. And then add the fragility of debtheavy household finances.

The second, though, would suggest the opposite, and is supported by our extraordinarily strong trade position and booming Budget revenues that have brought the Budget already back into the black.

While inflation was tracking just below 2 per cent and jobs remained strong, the RBA could and

would most sensibly sit at the 1.5 per cent official rate it has had since August 2016.

Indeed, it specifically spelt that out in the minutes of its last meeting in April; that it would require both (too) low inflation and a rising jobless rate to trigger a rate cut.

Yes, inflation then “surprised” by coming in at just 1.3 per cent for the year to the March quarter and indeed at zero for the quarter itself. But even so, why would that trigger an

immediate rate cut?

Further, it wasn’t actually

that surprising, especially to the RBA. The big factor was the fall in petrol prices, otherwise the annual rate would have been 1.6 per cent and the quarter 0.3 per cent.

And indeed, the RBA had signalled in the minutes – ahead of the inflation data – that low petrol prices would have that sort of impact. Low prices, importantly, which have since reversed.

THAT said, clearly at the very least RBA governor Philip Lowe’s rhetoric will have to change in the wake of the excessively low inflation number.

At the moment, it’s that an unchanged rate “would be consistent with sustainable growth in the economy and achieving the inflation target over time”.

Lowe’s additional – one might called analytical obiter dicta – commentary has been that the next rate move could be either up or down.

That dicta is now clearly not the case (for the foreseeable future), so it has to go. But in moving to an explicit easing bias, two tough and linked questions are posed.

Does the RBA all but explicitly commit to a cut in June? And if so, why wait until June?

The added complication

from this meeting is that on the following Friday, the RBA will release its latest forecasts. They will clearly downgrade both GDP and inflation expectations.

Making it then yet even more “interesting” is that Lowe last year adopted the practice of including in his Tuesday rate statements the key forecasts that will be in the coming Friday’s detail.

Thus the rate decision will sit right next to those GDP and inflation downgrades. It might be considered “awkward” for that decision to be no change.

Westpac’s Bill Evans – who as I have noted, has been extraordinarily accurate in predicting RBA rate moves over the past few years and was an early forecaster of rate cuts (two) this coming year – yesterday predicted it would cut its inflation and GDP forecasts.

Perhaps somewhat surprisingly, Evans did not then join the consensus of a May cut; instead he “joined me” (I joke) in predicting the RBA would emphatically signal a rate cut to come, but still only in August.

Now all this sits below the RBA’s official mandate from government to try to keep inflation between 2 and 3 per cent. When it was around 1.8 per cent the RBA could be and was patient. But at 1.3 per cent?

IWOULD add a further factor. Arguably a rate cut would be the ultimate pushing on a string. Three big global factors are imposing massive and sustained downward pressure on inflation – China, the internet and technological change.

Then there are two “process complications”.

Unusually, the RBA has had a full week to “think about it all”. Normally it goes straight from the CPI at 11.30 on a Wednesday to the internal meeting to decide the governor’s recommendation to the board the next Tuesday.

This month the CPI came early.

Then there’s the election. As I have written for years – indeed decades – the RBA would change if it believed it had to. As it did, most strikingly in November 2007.

But those are the key words: if it “had to”. Simply, it doesn’t.