Keiran Davies is an economist at Barclays in Sydney. He’s been around Australian markets for a long time and knows the RBA well.
Overnight he released a note changing his forecast of no rate cuts from the RBA to two cuts taking the cash rate to 2%. But, said he did this “reluctantly” and only as a result of signalling in the press this week, via Terry McCrann, that a rate cut is imminent.
Davies notes that in December the RBA seemed to place a cut on the table and then withdrew it in Governor Glenn Stevens interview with the AFR last December.
The RBA first raised the risk that it might cut rates in early December, when it indirectly suggested it could cut rates if the AUD did not fall below 80 US cents. Subsequently, though, the Governor pushed back on rate cut expectations in an on-the-record interview, arguing that aside from the currency, he thought a positive narrative would be required to justify rate cuts, including: 1) a judgment that a cut would boost confidence; 2) low inflation; and 3) a calmer housing market.
Obviously the RBA has not actually cut rates yet so it is somewhat preemptive to do a post mortem of the cut. But Davies says that the McCrann article, “raises some important questions for the RBA,” in terms of signalling of rate cuts.
“We would have thought that was a better way to communicate a major shift in view given that the last public statements from the bank was December’s forward guidance of a period of stable rates and the RBA Governor pushing back on market expectations of a cut. Assuming the RBA does cut rates in February, it seems likely to us that the market will be less accepting of future guidance from the RBA, while the strength of the signalling makes us wonder whether other board-members were consulted about restarting an easing cycle.”
He’s not happy and he does have a point.
But the RBA doesn’t meet in January and the speech circuit hasn’t really kicked off. If, and it is still an if, the RBA cuts rates next week Stevens will no doubt articulate his reasons in his statement.
Then we’ll all be informed.
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