RBA Panic? Not on your Nellie!

The RBA has done the right thing and let the inflation outlook give them room to cut rates. The Wordle summary is below and highlights the key drivers of growth and inflation.

So in the context of what they said last month, and where the economy is I find it interesting to have read many comments about the so-called “shock” RBA move this afternoon. Ok perhaps bigger than expected but hardly unwarranted.

I’ve seems some economists write on twitter that it was an inappropriate decision but this same economist has been pretty much wrong on rates and the economy for the best part of about 12 months now yet remains unreconstructed.

This is a tough gig but that is certainly a really bad trot.

I’ve seen the 50 basis point move characterised as “panic”  and I have to say that those who are saying this can hardly be living in the economy that I exist in (maybe its cause I live outside the big smoke?) or actually listening to what the RBA is saying.

After last month’s non-move I wrote,

I’m not going to get on my high horse or have a rant because the RBA just isn’t listening – they know they need to ease  but like Old Generals they are fighting the last war. Clearly the 5% CPI print in 2008 has scared them badly or why else would they say in the Statement,

At its next meeting, the Board will have the opportunity to reassess the outlook for inflation, taking into account not only data on demand and output but also forthcoming information on prices.

I’m happy to stand corrected but I don’t think I’ve ever seen something so overt from them about the next meeting and the parameters.

So when we saw the CPI reading for the last quarter the hurdle to a cut evaporated. So it then became a question of how weak the economy might be getting in the weeks and months ahead.

Because what the RBA recognises, while many interest rate strategists and pundits often forget, is that monetary conditions are not just about interest rates – not in a small open economy with a free-floating exchange rate like Australia.

To this end I think they recognise that monetary conditions in the economy, when you combine interest rates and the exchange rate, remain tighter than they should be. In today’s statement the RBA notes that the terms of trade peaked 6 months ago and the economy is being buffeted by,

the persistently high exchange rate

So I think part of today’s move was aimed at targeting the Australian Dollar and so far they have hit their mark initially with the currency falling 1 cent in trade today as you can see in the chart below.

To my mind what the RBA have done is take an opportunity afforded them by the low inflation and catch up to where they probably should have been if they were not so fixated on negative aspects of the mining boom with relation to prices in the economy.

I’m guessing the RBA is hoping this is a circuit breaker and lets hope it helps but my sense remains there are more rates cuts ahead of us as discussed this morning.

I applaud their courage and I am minded of the “shock” RBA move which  had the most impact on me as a trader and portfolio manager. It was July the 31st 1996 – and the RBA surprised most of the market by cutting rates 50 basis points to 7%.

At the time the Governor of the RBA in his statement said,

The decision reflects the Board’s judgment that underlying inflation is consistent with the 2-3 per cent objective, and its view that the economy has the capacity to grow a little faster than at present without threatening this objective.

It seems to me this is the place the RBA and its Governor finds itself again at present. Oh and that Governor back in 1996 – Bernie Fraser who suggested this 50 point move overnight.

Full RBA statement here.

Have a great day

Gregory McKenna

www.twitter.com/gregorymckenna

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, 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 however you do need advice on Investments, Economics, Funding and Liquidity, Interest Rates and Forex and Derivative markets 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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