Monetary Policy: View Change

 

Since Tuesday when the RBA delivered the 50 basis point rate cut, there have been a few events to make me rejig my view on where the RBA will move the official cash rate in the months ahead.

There was always going to be downside (rather than upside) risks to my view that the RBA would cut to 3.5% “around the middle of 2012”.  Just a week ago, I thought that view was still valid.

Alas, I suspect it is now wrong and there has been a mix of issues that have emerged in recent times that smell like more rate cuts ahead.  In no real order:

• It looks like the banks are passing on a bit less than I first thought, not just with the 50 cut this week, but with any further cuts in the months ahead.

• Even though the Australian dollar is down a bit, it is concerning the after the cut this week it is still near 1.03 after the 50 cut and RBA rhetoric.  Maybe even lower rates are needed to push it lower.

• The global data flow has probably been a little less favourable than one would hope for.  US leading indicators, Eurozone unemployment, commodity prices.

• Local “mini”-data on the services sector, manufacturing and daily house prices have all been poor.

• There is no reason to think that fiscal policy will be anything other than “tight”.  I suppose this is not new, but I reckon fiscal policy might be a little more contractionary than I first thought.

With the 50 basis point cut still reverberating around the economy, it might be premature or even a little koukie to be changing views today.  But having also got a bit of a vibe on the economy and markets in Sydney today, a change of view is in order.

The new view from Market Economics is now for a 25 basis point cut in June, taking the cash rate to 3.50% with a further two 25 point cuts some time in the second half of 2012.  This means the risk are we see a cash rate of 3.0% by year end.

As things stand now, I hope I’m wrong and that we get a near term, meaningful turn in the economy.

If I am not wrong, the turn in the data will require some remedial action from the RBA in the form of a 3.0% cash rate.