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Tuesday, May 1, 2012

A bold RBA move (column)

First, a hearty congratulations to those who picked what was a very difficult RBA meeting: namely, Stephen Koukulas, Citigroup, Terry McCrann, Alan Kohler and one of the strategists at UBS. Almost all other analysts missed it.

I personally felt the May meeting was very much like the RBA’s December caucus and hard to call. I had a 40% probability on 50 and favoured a more conservative 25 basis points. My strongest view was that we would learn a lot about the RBA based on their decision today. And indeed we have.

The SMH has reported that the RBA staff recommended only a 25 basis point cut to the Board, but obviously not with a lot of conviction. I had said to folks privately that the outcome today would be about whether the more dovish non-staff members of the RBA board wanted to assert themselves. They did, and quite emphatically.

The banks should pass on around 40 of the 50 basis points, so this will deliver a very substantial reduction in lending rates. And frankly at a perfect time.

In the RBA’s best assessment, the housing market had “shown some signs of stabilising recently”, but only just. The first quarter house price data was flat in raw terms, and softer if you seasonally-adjusted it. The month of April had been very mixed and was arguably disrupted by ANZ’s decision to raise rates.

At the time of writing the Aussie dollar is at 103.34 US cents, and this is actually good news for the RBA. The resilience of the currency, and the absence of any sudden depreciation, rules out the risk of a surge in tradable goods inflation for the time being. That would be a key risk the RBA would be mindful of in the event it reduced rates hard, which it has now done.

At the margin, I cannot help but think that today’s house price data would have been influential on the RBA’s decision-making. Staff were telling media that they were angling for only a standard move. But the ABS data for the first quarter combined with RP Data-Rismark’s weak April made it clear that any recovery in the housing market was hesitant, especially following the big banks’ efforts to claw-back the RBA’s December rate cut.

The RBA has not given any indications that there are further cuts in the pipeline. My best guess is that the unemployment data will be most influential in determining additional moves. The stability of the unemployment rate at around 5.25% has been the most persuasive argument for being cautious with cuts. But that could change if, as the RBA forecast in January, the labour market weakens further. While leading indicator data suggest it will not, it is ultimately an empirical question.

In summary, today’s decision by the RBA is terrific news for Australia’s housing market, and will assist in firming up the consolidation that is currently taking place.