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Friday, November 4, 2011

What I thought at 8am *before* the RBA's SMP was released...

A colleague shot me an email asking what I expected the SMP to say. This is how I responded on-the-fly:


Sure, some thoughts on SMP today:

1/ RBA to revise down all 2011, 2012 and 2013 core CPI forecasts;

2/ Expect all core forecasts to be between 2.5% and 2.75%, possibly a 3% in 2013;

3/ RBA highly unlikely to give any direction in SMP given it does not know itself what it will be doing with rates following Q4 CPI in late January. Thus, SMP likely to be vague/open-ended, and could cause a little confusion;

4/ Very different to previous SMPs (ie, last 2x SMPs have been very hawkish, as I expected at the time);

5/ Market already pricing in 100bps of cuts through to June 2012, so hard to see how SMP is going to make it more dovish;

6/ I think RBA will be very eager to emphasise "neutrality" as main policy objective. This implies that the RBA may want to potentially disavow market pricing for another 4x cuts by June 12. Thus Dec 11 IBs could sell-off as market reduces probability of uber-near-term cut.

I note that the December 11 IBs are indeed off 4.5 points today following the SMP.