SCOREBOARD: Rates reason

The decision by the RBA to hold interest rates was a good one and it's unlikely we'll see further cuts soon.

A good decision by the RBA Board to keep rates unchanged at 4.25 per cent – and from my read of the statement and the economy in general, it’s unlikely we’ll see any more cuts. For a start, I don’t sense from the press release that the decision to hold was close or anything, but we might find out more in the minutes.

But, the last paragraph sums it up (as usual) and the board said that "With growth expected to be close to trend and inflation close to target, the Board judged that the setting of monetary policy was appropriate for the moment. Should demand conditions weaken materially, the inflation outlook would provide scope for easier monetary policy.”

And that's it just there. The bias is still to cut, that much is clear, but they've tied it to a weakening in demand which is appropriate – and not just a weakening in demand, a material weakening in demand. The thing is, most people expect decent growth this year, so that suggests we won't see another cut. Overall, the view that the Australian economy is weak or what have you isn’t all that compelling. Indeed it’s not really backed by the data the way I, and I think even the RBA, read it. The Q3 national accounts show private demand at its strongest in about four years after all. Rather than soften then, the economy has accelerated and economic data to date suggests that will continue.

Similarly if you look at the RBA’s press release there was no real discussion of weakness. Credit is weak, and the board acknowledges this, although they also suggest there has been some stabilisation in house prices of late. Overall their view on the domestic economy is that it is growing ‘close to trend’ while the unemployment rate has "been steady over recent months”. Steady at a very low rate that is barely above full-employment or NAIRU. So no real changes to the view, no broad-based weakness or deterioration. Policy meanwhile is probably on the stimulatory side.

On the global front, the board noted that Europe was weakening with downside risks; they observed downward revisions to global growth forecasts, but highlighted better US data. Financial market sentiment was also seen to "have generally improved since early December”. Not a lot otherwise on it.

For the market, I think it’s time to maybe pay the back-end of OIS curve on the view that Greece doesn’t implode. There are misnomers galore in our market, unfortunately, so a good entry point might be some time off. But with the information we have at hand, the US economy is accelerating and Europe stabilising – some of the pessimism will wane I suspect. So for now, rates on hold for most of this year with a strong probability of a 25bp hike later in the year. While our futures sold off sharply after the decision, IBs still price an aggressive easing – 75 basis points with rates to trough at 3.5 per cent by August. A 44 per cent chance of a hike back to 3.75 per cent by December is then priced from there. Dec IBs were toying with a 3.25 per cent cash rate prior to that. Don’t forget the RBA’s Statement on Monetary Policy this Friday at 1130.

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

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