Wow, I had missed this article by Fairfax's Peter Martin. He writes on the presumption he has spoken with people who participated in the RBA's last Board meeting:
"The Reserve Bank board is all but set to cut interest rates at its next meeting Melbourne Cup Tuesday. Members who met in Sydney yesterday felt the economy was weak enough to justify an immediate cut. They held off wanting to be sure they could ‘tell a credible story’ about inflation."
Let's just contextualise these claims against a few hard facts:
1/ Since June 2002 the core trimmed mean measure of inflation in Australia has averaged 3.2% pa (I only select June 2002 to put some distance between that date and the GST in July 2000). The RBA's target is "two point something" and as close to the 2.5% mid-point of their target 2-3% band as possible. They have missed their target by some margin on this basis;
2/ Since June 2002, the core weighted median measure of inflation has averaged 3.1% pa. Another long-term target miss;
3/ In February and August, the RBA published two comprehensive sets of core inflation forecasts out to 2013. All project above-target core inflation for 2011, 2012, and 2013;
4/ The RBA's top economist, Dr Phil Lowe, has published a speech this year concluding the RBA consistently underestimates the strength of Australia's inflationary pulse once the cycle gets started;
5/ In the year to June 2011, headline inflation was 3.6% per annum (albeit flood-affected);
6/ In the year to June 2011, core inflation had risen from a low of 2.3% pa in December 2010 to be 2.55% pa (revised), and had, in the RBA's repeated words, "bottomed" and was starting to increase again;
7/ Global headline and core inflation measures, according to IMF, are rising robustly;
8/ Monetary policy settings in the G7 economies are near-zero with many nations declaring they will tolerate high inflation;
9/ The one major restraint on domestic inflation, the soaring Aussie dollar, has now fallen 10-15% from its highs;
10/ The RBA has stated that Australia is, for the first time in a decade, starting to import Chinese inflation;
11/ Many productivity experts, like Saul Eslake, and the RBA, claim there is evidence to suggest labour productivity may be weak; and
12/ ABS data clearly implies labour unit costs have risen strongly.
As Martin correctly notes, the RBA was, contrary to some silly suggestions, never going to cut rates before the Q3 CPI absent a total global meltdown. For the RBA's sake, and the credibility of the many dovish forecasters, I hope we get a very low core inflation print in Q3. It would be terrific if we were able to conclude with confidence that Australia no longer had an inflation challenge to face, and if the RBA could cut interest rates 50 basis points. The main beneficiary would be the five million Australian households with variable rate mortgages, after all (yours hawkishly included).
