I’m locking rate cuts in.
So the RBA has held its fire. There was no rate cut today.
Personally, I’m not surprised. (I actually wrote this blog yesterday). I always thought it was going to be an incredibly long shot that they might cut rates right in the middle of an election campaign. The RBA doesn’t like to drop bombs like that.
But it does mean that a rate cut next month is all but locked in. Markets are pricing it as an odds-on favourite.
I’ve been saying this for a while now, but in recent months the case for a rate cut has become a deafening roar.
There are three massive reasons that are going to be driving next month’s rate cut:
1. The RBA sucks at forecasting
Well, either the RBA sucks, or the economic data has been surprisingly bad. (Probably a little bit of both). But whatever the case, inflation continues to come in way below RBA projections.
Remember, for all intents and purposes, the RBA has one job – to keep inflation between two and three percent – to keep it in the target band.
But, the RBA continues to fail. The CPI grew by exactly 0.0% in the March quarter, making the RBAs projections for this year woefully optimistic… again.
And that means that the RBA’s mandate to keep inflation between 2 and 3% is actually looking impossible… again.
Take a look at the chart. The RBA has been below target for three years straight now. If that’s not a call for rate cuts, what is?
2. Housing gives us headroom
One of the reasons the RBA has been reluctant to cut is because they didn’t want to be seen to be throwing fuel on an already over-heated housing market.
That’s no longer a worry.
Partly that’s because the housing cycle has turned and prices are coming off on their own accord now anyways. But also because APRA has stepped in to a do a bit of the heavy lifting here.
With APRA forcing the banks to cut back on credit – or make the available credit tougher to access, that means any rate cuts won’t have the same impact they once would of.
Anyway, these days the RBA will be happy to cut, knowing that no one is going to accuse them of blowing a bubble.
3. The economy is full of slugs
At the same time as the RBA was overshooting inflation, the RBA’s forecast for GDP growth was also blown out of the water with the print of the December data. Economic growth is much more sluggish than they thought.
But if growth is over-projected, it must mean that employment and wages are over-projected too.
And logically, if the current levels of interest rates were ‘just right’ for an over-projected future, now that we know what the reality is, it must mean that interest rates are too high right now.
And that means rate cuts.
Lock one in, maybe two.
So we didn’t get rate cuts today, but I think it’s a certainty next month. And given the RBA likes to cut in batches generally, I think we’ll probably see a second cut at some point in the second half of the year.
The data is practically screaming for it.