What will the Reserve Bank do this week?

by Stubborn Mule on 3 October 2011 · 19 comments

It has been a while since I have had a Reserve Bank poll here on the Mule. The Bank will be sitting down on Tuesday to decide whether or not they should adjust monetary policy. Westpac chief economist, Bill Evans, was the first of the bank economists to start predicting that the next move in the cash rate would be down back in July. Since then, some other economists have come around to Bill’s perspective, particularly given the global financial chaos as European banks face a slow-motion bank run. Others are still expecting that the Reserve Bank’s bug-bear, inflation, will remain sufficiently threatening to ensure that the next move in rates is up. But perhaps it is too soon for the Bank to do anything at all.

What do you think? Get your vote in before the announcement is out at 2.30pm on Tuesday (Sydney time).



UPDATE: the results are in and Mule readers got it right: 93% of respondents thought there would be no change in cash rates, which was indeed the case. No-one predicted a rate rise.

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{ 19 comments… read them below or add one }

1 Danny Yee October 3, 2011 at 8:13 pm

No idea what’s going to happen in the short term, but in the long term I think rates are headed downwards. The world is in a long-cycle deleveraging depression and Australia isn’t decoupled.

2 Stubborn Mule October 3, 2011 at 8:36 pm

@Danny to be fair to Bill Evans, he said much the same thing: his prediction was that rates would be cut over the following 12 months.

3 Stubborn Mule October 3, 2011 at 8:57 pm

Perhaps I should also add that I voted for no change…

4 Senexx October 4, 2011 at 10:06 am

I’m indecisive between no change and a cut.

5 Nords October 4, 2011 at 12:27 pm

In my opinion, and this was made well before Bill Evans, the next move by the RBA will be a cut and it will be by 100bps. It is more likely to be next month though than this one. If you look back over history you will see that monetary policy is accentuated by lower highs and lower lows. A classic case of the boom bust policies of the RBA and other central banks.

6 Stubborn Mule October 4, 2011 at 1:48 pm

@Nords and don’t forget, speaking of track record, the RBA does like to move on Melbourne Cup day!

7 Senexx October 4, 2011 at 2:22 pm

Ultimately I went for no change.

However I think it will be a 2x25bps cut or a 50bps cut not 100. The RBA will want to examine the effect of a smaller cut before moving 4x25bps in my view.

8 Stubborn Mule October 4, 2011 at 3:29 pm

@Senexx you and all the other respondents who picked no change were right on the money.

9 Magpie October 4, 2011 at 7:07 pm

Congratulations y’all and Stubborn (I didn’t vote, btw).

I’d agree with Danny (and Evans): in the mid-term, the logical thing to do is to lower interest rates.

However, it’s the RBA we’re talking about… You know, inflation, mining boom, soaring wages… Scary stuff, really.

10 Danny Yee October 4, 2011 at 10:11 pm

The ten-year bond yield is back at 4%, which is I think what it bottomed out at in 2008. I realise bond yields have no direct coupling to the RBA target interest rate, but that still seems like the market is voting for a lower interest rate future.

11 Magpie October 4, 2011 at 10:56 pm

After giving this business some thought, I’ll venture a guess (you guys mark my words: if I am off the mark, feel free to make fun!): the RBA and the inflation alarmists will start whingeing about inflation induced by the falling dollar.

It is too soon for the weakened Aussie to have had much impact in the next ABS inflation figures (which I understand will be released at the end of the month), but I could almost bet in the next weeks and months we’ll see a lot of talk about this in the blogosphere.

12 Stubborn Mule October 5, 2011 at 8:29 am

@Danny an even better guide to what the markets are expecting over a shorter time horizon that 4 years is this page of futures prices. Although the IB contract is not the most liquid of the rates contracts, it is a good indicator of market expectations and the December contract indicates that the cash rate is expected to be back down to 4% by the end of the year.

@Magpie: A$ effects on inflation take a while to work through. You may be right about the blogosphere, but I don’t think that the RBA will be too concerned about the dollar yet. They would understand that the main thing driving the dollar down is in fact the expectation that interest rates are headed down.

13 Magpie October 5, 2011 at 7:29 pm

@Stubborn:

“I don’t think that the RBA will be too concerned about the dollar yet.”

I agree that the RBA should not be too concerned about the AU$ (which is probably what you mean). I hope they won’t; but I am not at all sure of it.

A few days ago I realised something: at the G20 Pittsburgh meeting in September 2009, the Finance ministers and Central Bank governors pledged to keep the monetary and fiscal stimulatory measures and to maintain them in a coordinated fashion. The RBA lifted interest rates less than 2 weeks after that, making headlines worldwide.

“They would understand that the main thing driving the dollar down is in fact the expectation that interest rates are headed down.”

That’s probably a good and safe guess about what’s behind the fall in the AU$, and I am sure there is a lot to it. The second guess (the one about what “they” would understand) is much riskier, though.

I believe you are not taking something into account. The AU$ reached the level it did **largely because** interest rates were kept excessively high by the RBA, for too long, in the first place. This follows almost directly from your own statement, btw.

Let’s remember that last year there was a debate on this subject. At one hand, those favoring interest rate increases argued (among a multitude of things) that the rising AU$ was an effect of the mining boom and it had little if anything to do with carry trade. At the other hand, some argued that carry trade made possible by high interest rates was behind it.

Well, the mining boom is still there, even though the AU$ is falling without any change in interest rates (which, incidentally, would support the second school of thought). What would stop these inflation hawks to use the mining boom again as an argument to call for higher interest rates?

Besides, it’s obvious that the RBA considers that other things (like local manufacturing survival and employment) are secondary to anti-inflation policy.

14 Robert October 26, 2011 at 11:42 am

Hey, if this story stays up the top for a while, we could redo the quizz every month!

Rob

15 Stubborn Mule October 26, 2011 at 2:59 pm

I know, I know….long time no post! But I am still alive and am still planning to post again soon.

16 Robert October 26, 2011 at 3:09 pm

Hehehe.

Anyway you can fit in 3D printing in with your normal themes? I’m very curious about how it will affect economics and society in general.

17 Stubborn Mule October 26, 2011 at 5:44 pm

Hmmm. Can’t say I really know anything about 3D printing.

18 Robert October 31, 2011 at 9:22 am

I’d recommend having a look.
Some pages that may give you a feel include:
http://www.economist.com/node/18114221
http://elidourado.com/blog/political-economy-of-3d-printing/
http://reprap.org/wiki/Main_Page

Ok, they aren’t quite the Star Trek replicators, but I think its a game changer that will have big economic impacts, and all sorts of IP conflicts.

19 Magpie November 4, 2011 at 4:14 pm

So, not only did the RBA lower interest rates here, but the ECB also lowered them in the Eurozone…

I’m extremely happy to declare myself a fool! Go on, make fun! :-)

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