SCOREBOARD: Rates preview

So the RBA meets again tomorrow and as we've all been hearing it's a very close call as to whether they'll cut or not. Futures have priced in 25bp and surveys of economists typically show that the median forecast is for no move – although only just. More specifically, 12 expect nothing, 4 expect 25bp with 5 expecting a 50bp cut.

As I mentioned earlier I have a low conviction call for rates to remain steady, but I won't bat an eyelid should they pop off another given that global forecasts are certainly woeful. I wouldn't punt on it but if you're interested I'm hearing online betting websites have evenly split odds for 0, 25 or 50.

The reason I'm leaning toward no cut is because abstracting from said forecasts (and the constant flow of rhetoric), the evidence suggests very tentatively that we may have passed a trough.

Take the global economic data. The emerging signs of a bottom are embryonic at best and I'm fully aware of that – but they are there. Most importantly, US housing data has turned up, with every major data indicator surprising on the upside. So too global PMIs, durable goods and then of course there is the equity market rally – up some 25 per cent.

OK, so it's all off a low base, and indeed it may even prove to be a false dawn. Nevertheless, for policy makers who need to determine whether consumers and business are responding to stimulus – it matters less what base it's off when rates globally are already at record lows and major central banks are printing money. What matters is evidence that they are responding.

So the question becomes one of emphasis. Will the RBA place more prominence on forecasts by the IMF or emerging (albeit tentative) signs of a trough being reached?

Now I've got a lot of respect for both the IMF and OECD but I distinctly recall both of those organisations urging the RBA to hike rates further last year to deal with inflation. An action that has directly contributed to Australia's current downturn – our housing market would be a lot healthier now in the absence of rate hikes last year.

I'm not emphasising this point to ridicule them, I highlight it to caution against elevating forecasts to some of kind of prophetic or fact like status. This is something I think that the RBA would be acutely aware of. Instead the RBA, as they've indicated in the past, can look at the consequences of each decision. What's the worst outcome from each possible action. So let's look at that.

Let's assume the OECD and the IMF. are correct. Well, then it's true enough that the chance of us avoiding a recession would be unlikely. Just quickly on that score, I need to address a query I got recently – I have never said that we won't have a recession; I've always maintained that it was a close call – just not inevitable, not a fait accompli. I have been unprepared to call it without some evidence, and at the peak of the debate we didn't even have any first quarter partials to go off. In any case, many commentators have said that this possibility now means the RBA will have to cut again. Yet think about it a little – what would an additional rate cut now achieve?

The RBA's own rhetoric suggests that "there are limits on how much we can insulate ourselves from what is happening abroad”. Think of it this way – a rate cut won't lift exports, neither would it encourage business investment which, as is well recognised, is driven by 'animal spirits'.

Moreover, if the global economy is going down the toilet and commodity prices with them, then even zero interest rates wouldn't stimulate capacity expansion. Looking at other sectors of the economy – we have already seen a sharp and rapid response in the lending figures – but again this just highlights why we don't need additional cuts, the cash rate (and a broad spectrum of rates) is already historically low. Consumers? The February retail numbers perhaps highlight the fragility of households – but look if consumers are reining it in, this is a risk aversion problem. They have the money and are choosing to not spend it (savings are at an 8-year high) so lower rates here will not help as the additional money would continue to be saved. All of that being the case, cutting rates certainly wouldn't do any harm, but then again neither would leaving them at 3.25 per cent.

It's when we look further ahead than the next six months or so, to the eventual recovery, or even assuming a more optimistic growth scenario in 2H 2009 (one that the OECD suggested was quite plausible it should be noted) that the costs of cutting further become apparent. These are points I've made before so I won't harp on. Suffice to say that inflation and destabilising rate hikes etc would ensue. This idea is gaining traction and the TIPS market is telling you there are plenty of investors who think that the end result of all this global stimulus will be inflation.

My point is that even if the RBA thinks this is a low probability event, the costs of being wrong are significant and argue in favour of pausing again. Importantly, the RBA has suggested prospects in the 2H 2009 could be better.

In sum, a further cut now is unlikely to be able to do much to help if those bearish growth forecasts eventuate. The RBA must know this, Battellino alluded to it – so contrary to suggestions stating otherwise, I'm not sure that the RBA's recent downgrade was sufficiently material to see a cut tomorrow.

One could still come as there are plenty of business leaders on the Board and as surveys keep telling us, business has taken a massive hit to confidence. It's a close call and will depend on the prominence the board gives to the IMF's forecasts and the extent to which they realistically think another rate cut could help (noting the cash rate is already historically low and that the transmission mechanism works here).