There was nothing especially important revealed by yesterday's Minutes. After all, we already knew that the weak data flows in recent months had pushed the RBA to the sidelines. We knew back in May that the RBA had become data-dependent insofar as it wanted some more of the high-frequency data-flows (eg, wages and employment) to nail down its case to hike, which never transpired. This, as I have argued many times before, is precisely the mistake one makes when you become backward-looking and data-dependent. If the data don't stack up, you are stuck. The RBA are now left rolling the dice on the July inflation numbers, which they will be praying are benign. Another high print and the RBA is going to look seriously silly and confront a chorus of criticisms for not hiking in the 1H of 2011 (ex post facto, trust me).
Interestingly, after bringing forward all their projected hikes to June/July after the first quarter inflation data--guessing, quite reasonably, that an inflation-targeting central bank would respond to this information given that rate changes today are based on the Bank's forecasts for the next two years--many economists have now shifted their inaugural 2011 hike back into Q4. Westpac are at November, having previously flagged June, while UBS have just shifted to October, having correctly pencilled in August a long time ago.
As much as I respect these guys, I am not sure I understand the logic. In the base-case where the world does not blow-up, and Europe staggers along, if the RBA gets a high CPI print in July, they are certain to hike in August, and then possibly follow-up with one or two more, depending on the size of the print, and the performance of the domestic economy at the time.
Between now and late July, nothing much absent a solid resolution to the European debt woes is going to change the price of eggs in China. So why shift you rate call now? Why not wait until the inflation data comes out? The point is, if the data is strong, which let's say there is a 50:50 probability of it being, then you are going to have to pull back your October/November calls to August. Anyway, this is what UBS says:
"Since December, UBS has held the view that the RBA would 'hold-fire' on lifting interest rates in the 1H11, given the RBA's already pre-emptive action, the cautious state of the consumer and the likelihood that the transmission of the mining boom across the broader economy would take longer than expected to emerge. And since about February/March, we've been inclined to shift that start for the RBA later than August, as the data (helped by the weather) has been even weaker than we'd forecast. But a combination of Q1's high CPI print and the RBA's hawkish rhetoric has held us back from such a move.
However today, reflecting last week's poor data around consumer and business confidence, rising offshore uncertainties and today's more balanced tone from the RBA, we shift our long-held forecast for the next hike from August to October. We maintain our 50bp in 1H12, and thereby reduce our rate hike expectations over the coming 18 months from 100bp to 75bp. Obviously, a higher than expected core CPI print at the end of July (UBSe & RBA +0.7%), would still likely see a rate hike delivered in August, though in that event we'd still now only anticipate that that would be the only RBA move this year. Why October over November (post another CPI print)? If our forecast 0.7% Q2 core CPI print (end July) proves correct, it will only be the patchiness of the domestic economy, and the ongoing offshore risks that keeps the RBA from hiking near term; after Q1's 0.8%, a 1H11 annualised core inflation pace close to 3% is hardly acceptable (for a 2-3% target) unless growth is deemed too soft. If as we forecast, the 'green shoots' we believe we are now seeing on the domestic economy build to something more sustainable over the next few months, then with inflation already annualising near 3%, a further CPI print is likely unnecessary for an RBA already convinced of a very positive medium term outlook."
