Readjustment: inflation surprised but healthy export volumes point to a GDP pick-up. Photo: Jim Rice Wednesday’s surprisingly soft inflation for the third quarter has economists nationwide revisiting their forecasts for next Tuesday’s interest rate decision by the Reserve Bank of .
Those who predicted a cut, to 1.75 per cent, early next year said governor Glenn Stevens might now bring it forward to the November 3 meeting; those discounting any chance of a reduction agreed a case could now be made for further easing.
Finally, those who had stuck to their guns on a November cut said “told you so”.
At least one forecaster who won’t be swayed, however, is Westpac chief economist Bill Evans, who remains adamant – albeit slightly less – that the RBA will leave rates where they are, at 2 per cent, until such time that it has to start lifting them again.
He argues the RBA has looked past surprises in the consumer price index before, and third-quarter economic activity indicators – such as retails sales, export volumes and construction – are sufficiently strong to give the central bank this luxury once again.
The RBA’s decision to cut the cash rate in February was prompted not by an unexpected slowdown in September-quarter core inflation, he points out, but by the quarter’s alarmingly weak gross domestic product figures, which are published much later.
“The drop in core inflation was known at both the November and December [RBA] meetings, but it was the surprise slump in growth that was recorded in the September-quarter GDP report that printed the day after the December board meeting that prompted the rate cut,” he wrote in response to Wednesday’s data.
“The surprise drop in the inflation measure is not unique and, in the past, the bank has looked through a one-off number.
“The motivation for cutting next week would be a significant downward revision to the growth outlook, [and] the data flow and the RBA’s recent commentary does not point to such an event,” he said.
Nomura rate strategist Andrew Ticehurst agrees third-quarter GDP growth looks to have picked up after weak June-quarter activity but the CPI shock, added to recent bank credit tightening through higher mortgage rates, at least makes the case for a November cash rate cut.
Despite this, he is sticking to an earlier forecast for a February cut to the cash rate.
“If the RBA would like to lower the cash rate next week, they can mount a very solid case to justify the move,” Mr Ticehurst said on Thursday.
“They can acknowledge that global growth and regional growth is looking a little bit weaker; they could note that the domestic economy seems to be holding up relatively well, based on recent data.
“But they could say that the recent lower-than-expected inflation data allows the move, and they could also make some non-specific reference to modest tightening in financial conditions coming from decisions recently made by major lenders.”
Wednesday’s CPI surprise was just enough to convince HSBC chief economist for Paul Bloxham to change his cash rate forecast.
From an “on hold until further notice” view, he now believes the RBA will cut rates either next week or in December.
He said the recent round of home loan rate increases by the big banks “alone, was unlikely to see the RBA consider cutting its cash rate, given concerns about rising risks in the property market”.
“However, when combined with the downside surprise to inflation, the RBA now has multiple reasons to consider a cut,” Mr Bloxham said.
Regardless of their stance on next week’s RBA meeting, many economists question the value of any further cash rate cuts, given the law of diminishing returns.
With two cuts this year already leaving the cash rate at a historic low, and growing signs this has helped re-engineer the n economy away from its dependence on resource-related investment, a third reduction this year might do little more than spook business, consumers and other investors into thinking things are worse than they really are, they say.
“There is an array of factors that the Reserve Bank needs to take into account at next week’s board meeting,” says CommSec economist Savanth Sebastian.
“What is clear is that the collapse in the terms of trade and weaker inflation forecasts certainly doesn’t stand in the way of a rate cut.
“The key question is, does the central bank believe that another rate cut will actually boost spending and activity?” he said.
In any case, argues Western Asset heads of investment in Anthony Kirkham, the RBA should “keep its powder dry” until it really needs an emergency third cut.
“The RBA has been clever in their desire to not move lower unless forced to, and that would be because of some sort of calamity in China and the rest of the world,” he said.