RBA is going to cut – they just don’t know it

September 7, 2011

FOREX, RBA and Interest Rates

The RBA released its Statement yesterday after the Board meeting as is its custom. It is my custom, and many other pundits and commentators, to then go through the statement to try to distil from the change in emphasis and nuance what the RBA is thinking. Clearly the market doesn’t care what most economic pundits think because it rallied way before the trend toward interest rate cuts in forecasts became a trend – if you know what I mean.

Yesterday I read a few commentators who said that the RBA was still worried about inflation and in truth they keep telling us they are but I thought I might use a little bit of technology that I stumbled upon a few months ago to see what the RBA, either consciously of unconsciously, is worried about. This study revealed that the RBA is much less worried about inflation than many think and much more worried about growth – as well they might.

What did I use? Wordle (www.wordle.net) Wordle is a little program on the net where you can dump a bunch of text, or link a website with an Atom or RSS feed, and it will generate a “word cloud” of where the emphasis in the text or website is. Yesterday’s Statement from the RBA is graphically represented below and it is clear where the emphasis from the RBA is – growth.

Indeed the RBA mentioned growth 12 times to inflation’s 5. Of the mentions of growth only 1, about China “look solid”, is unequivicolly positive, 1 more is hopeful “growth is still likely to be at trend or higher, unless the world economic outlook continues to deteriorate” and the rest are all about the downside risks to growth.

Certainly there is confirmation that the RBA is still worried about inflation is the question of “the extent to which softer global and domestic growth will work, in due course, to contain inflation”. But you can see in the Statement the substantial shift in rhetoric away from last month’s decision about whether or not tightening was appropriate and was actually considered. We and I guess the RBA are very happy that they held fire last month and now with the US heading toward recession and Europe continuing to teeter we see in the cloud they are moving toward rate cuts.

This is shorter than usual as I am just back from a couple of weeks holidays and trying to catch up. Later today I will post my thoughts on the intervention in the currency markets dfrom the Swiss National Bank overnight to fix the CHF to the EUR and I will also be doing a full AUD update later this week.

greg@lighthousesecurities.com.au

www.twitter.com/gregorymckenna

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help.

Please Email the team at Lighthouse at info@lighthousesecurities.com.au or Greg directly on greg@lighthousesecurities.com.au

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