SCOREBOARD: Rate unknowns

Reserve Bank minutes will show how close the board's rates call was, but we're still flying blind on future cuts.

In the lead-up to Christmas, the calendar is pretty thin this week. The centrepiece for Australia will be the minutes to the December RBA meeting (Tuesday 1130 AEDT), where the bank cut 25bps to 4.25 per cent. I’m not sure that we’re going to learn a great deal from the minutes though. It’ll be interesting to see how close the call was, and certainly market economists were split down the line. But otherwise we know the reasons why they cut and these were outlined in the press release accompanying the decision.

Recall the board’s comments that "Financial markets have experienced considerable turbulence, and financing conditions have become much more difficult, especially in Europe. This, together with precautionary behaviour by firms and households, means that the likelihood of a further material slowing in global growth has increased”. Noting then the decline in commodity prices, the difficulty Australian financial institutions are having in obtaining term funding, subdued credit growth and a decline in asset prices, the RBA thought another 25bps was warranted.

Now at the moment, markets are pricing in a cash rate of 3 per cent by mid-2012 and a trough of 2.75 per cent by the third quarter of next year – 150bps in total. I doubt the RBA is really in a position to give a lot of guidance on this pricing though. It implicitly assumes a European meltdown, which may of course happen. Certainly the risk of a credit crunch has risen appreciably and we’ve seen no solutions from Europe that address the immediate confidence crisis. Things do not look good, but even so, it is impossible to forecast with any accuracy how events will unfold. We really are flying blind – and have been for months. So what can they say?

Across the sea, New Zealand releases third-quarter GDP (Thursday 0845 AEDT), which the consensus expects will be around 0.6 per cent. Consumer spending looks set to be a key contributor to growth on the expenditure side and the country is of course gearing up for a fairly decent rebuild following the Canterbury earthquake. Prospects for New Zealand otherwise should be good and really, markets have been playing a waiting game with the RBNZ, who’ve noted that domestic conditions themselves probably warrant a rate hike, although all of the European uncertainty has put things on hold. At this stage central bank rhetoric suggests one rate hike around the middle of next year.

Elsewhere there are a few points of interest. In the US it’s worth checking out US housing starts on Tuesday night (November data), and then on Wednesday we see existing home sales (also for November). On Thursday it’s a busy one, with the final estimate of third-quarter GDP, as well as personal income and spending and new home sales (both November data).

Otherwise, just keep an eye out for the German IFO survey, the ECB 3-year tender (Wednesday night Oz time) and any news flow regarding the European crisis. At this stage European finance ministers are holding a conference call tomorrow night to discuss the new fiscal compact.

Adam Carr is senior economist at ICAP Australia. See Business Spectator's glossary for definitions of technical terms used in SCOREBOARD articles.

Follow @AdamCarrEcon on Twitter.

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