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Thursday, October 25, 2012
Terry McCrann: Anyone calling a November rate cut is gonna be wrong
THE underlying CPI inflation number crossed the critical line in the analytical sand. It rules out a Cup Day rate cut and possibly - six weeks is a lifetime in financial markets and the economy these days - a December one as well.
This will be the first time, as governor, Glenn Stevens will have not presided over a Cup Day rate change. He's had six Cups and six changes - with the most controversial the rate hike in the middle of the 2007 election campaign...
Absent that, there is no way the RBA is going to cut after the underlying inflation number came in at 0.75 per cent for the September quarter which, on an annualised basis, is at the top of the RBA's 2-3 per cent inflation target.
Indeed, in a slightly different context, such a number would have been cause for the RBA to assess the need to raise the rate...
Now the reason why the RBA tends to change rates on Cup Day, and usually to increase them, is precisely yesterday's inflation data.
The second more substantial key is to understand that a Cup Day rate cut was not a certainty even if the inflation numbers had been benign.
As I wrote yesterday, a low underlying number - of 0.6 per cent or less - would have opened the door to a rate cut. But the RBA would not automatically have walked through it.
One choice, incidentally, and importantly, for the RBA would have been between a November or a December cut. And that's why now, if a November cut is ruled out, the RBA will need a reason to cut in December. To override the inflation data, so to speak.
There are a series of powerful forces at work. The RBA is not embarked on a conventional rate-cutting cycle, where it broadly wants to get to a destination to provide stimulus to an overall sluggish economy.
It is cutting into an anticipated slowing in the unprecedented investment cycle of the resources boom and an expected sustained, and perhaps even sharp, fall in commodity prices and so our national income.
But it is doing so from a position where rates are already quite stimulatory, and with an economy that is still growing near trend and with unemployment relatively low.
It is doing this against an extraordinarily unique, complex and potentially volatile global backdrop...
This all adds up to the RBA being most uncomfortable with embarking on a series of rate cuts. It fears being forced into a mix of low rates and a high Aussie dollar - and a reinflation of a property asset bubble.
In sum and in short, after cutting its official rate by 150 basis points starting last Cup Day - an effective 125 points or so, at the actual borrowing coal face - a pause was more likely than not anyway...
It's hard to read the carbon tax footprint in the numbers. But it would have been significantly, but not entirely, washed out in the underlying inflation calculations. So the RBA is not jumping at carbon tax shadows in holding off on another rate cut.