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Friday, June 1, 2012
Terry calls an RBA pause while Mitchell thinks they cut
The hard truth is nobody--including the RBA Governor and his staff--know what will happen until the Board meeting is concluded at 12.30pm on Tuesday.
Terry picked 50 in May, but couldn't catch the pause in February. The markets also predicted a cut in February, but thought 25 was more likely in May. We are told the RBA staff formally recommended 25 in May, but, as happened in 2011, the Board collectively landed on a different outcome. So if the RBA staff cannot call their own Board meetings, it's an arduous task for outsiders to pick these more finely poised decisions.
There is an enormous amount of news/data to still flow before Tuesday. But I suspect US payrolls and local house price action increase the chance of 25 (even though the latter has been known by the RBA for some time given the daily publication of the housing data).
Balanced against this is the big decline in the Aussie dollar, which hit 95 US cents tonight. If the UK can import boat-loads of inflation because of a 20% trade-weighted currency depreciation, so can Australia. The RBA knows this and will be wary of throwing too much fuel on the flames until it is certain that a downside scenario for the global economy is materialising. It meets every month, so should be in no great rush. Other arguments against cutting include the unemployment rate, the capex spending, investment intentions, wages, and the pending GDP data for both Q1 and any revisions to prior quarters.
I think 50 is unlikely although still possible if some seriously adverse event materialises before the meeting. As in May, which was touch-and-go between 25 or 50, a 25 basis point cut as opposed to no move seems like a tough one to call right now...