The RBS team are top-notch:
We favour no change in rates in February.
Barring a worsening in Europe or indirect signalling by the Reserve Bank, we still hold the minority view that the Bank will leave the cash rate unchanged at 4.25% on 7 February. We think that there is not enough new information to justify another back-to-back rate cut. Globally, Europe is in recession, but is not quite as bad as had been feared, the US has improved and China has slowed in line with expectations. Locally, employment has disappointed, but unemployment has been stable at 5.2% and the Q4 CPI seems unlikely to trigger revisions to the Bank's forecast profile for ex-carbon tax underlying inflation in February's Statement on Monetary Policy. That said, banks are complaining about higher funding costs, although we are not sure whether the Bank feels the need to respond to this with a rate cut.
Recent revisions have lifted underlying inflation.
Following changes introduced last year, the Bureau of Statistics now seasonally adjusts most of the CPI and seasonally reanalyses the data each quarter. As a result, the seasonally adjusted CPI and estimates of underlying inflation have been revised over time, by more than we would have expected. In particular, the average of the weighted median and trimmed mean CPIs have seen notable revisions. For example, average Q2 inflation was initially estimated at 0.9% on the 15th series basis and then revised to 0.6% on the 16th series basis using the new seasonal adjustment methodology before being revised again to 0.8%. For Q3 inflation, it initially printed at 0.3% and has now been revised to 0.4%. If further revisions are similarly biased, then this would raise doubts over the real-time estimation of underlying inflation using the Bureau's new techniques.
