Bass, who is quite dovish, usually gets the inside running from his RBA buddies, and this is another great column. He lists many obvious reasons why the RBA would not cut, and argues, as I have, that the bar will be a very low core CPI print of 0.4% or less. Here's hoping we get that low CPI number! Some of his key arguments include:
*"[R]ather than clearing the way for a rate cut, an underlying inflation result only in line with RBA expectations would still leave next month’s rate cut decision a close run affair. To be guaranteed a rate cut, we’d need to see a much lower underlying inflation print – of perhaps around 0.4 per cent or lower."
*"At this stage, however, the case for a near-term rate cut does not seem as clear cut as financial markets suggest – despite last week’s weaker than expected December labour market report. What’s more, the market is implicitly assuming another global financial market meltdown, given its aggressive interest rate cut expectations for the coming year."
*"But why should the RBA cut interest rates again so soon? Yet despite the ongoing global financial market chatter, risk premiums in this troubled region have, if anything, tended to ease in recent months. While Italy’s 10-year bond yield reached a high of 7.25 per cent in late November last year, it has since eased to a (still high) 6.26 per cent. Spain’s 10-year bond yields have eased from 6.7 per cent to 5.5 per cent over this period. In equity markets, the Stoxx Europe 600 Index is already up 16 per cent over this period – and up almost 5 per cent for the year to date alone."
*"Europe aside, risks in other parts of the globe also appear to have lessened. Despite weakness in exports and property investment, China still managed to report solid economic growth for the December quarter, again forestalling fears of a hard landing. And perhaps most critically, momentum in the US economy is also picking up, with notable recent declines in weekly jobless claims and rising home sales. The failure of the global economy to implode has been reflected in heartening rebounds in local business and consumer confidence."
*"What’s more, there are tentative signs that lower interest rates are beginning to entice buyers back into the home market. Westpac’s survey of household house price expectations have firmed, and home lending posted a solid gain in November."
