The Bank of Canada surprised everyone this week by cutting rates, the ECB surprised many by finally delivering a monster-sized QE program and the Danish central bank cut for the second week in a row, taking rates to -0.35%.
But just because everyone else in central bank land is easing, and markets are increasingly pricing a move in here in Australia, doesn’t mean the RBA will ease at next week’s first board meeting for 2015 according to Soc Gen’s Asia Pacific chief economist Klaus Baader.
Rather Baader says that “while we recognize that the risk of a rate cut – or cuts – from the RBA has increased given the international backdrop, we maintain the view that stable rates for a very long time are the more likely scenario.”
The reason Baader is not in the Westpac camp saying rates will be cut next week is that he believes the RBA will focus on the state of the Australian economy which he says appears to be doing fine.
The recent economic news has surprised on the upside. Retail sales in October/November were a respectable 1.4% up from the Q3 average (5.6% annualized), notwithstanding what was likely to be weak inflation. Trade data also surprised on the upside, pointing to another solid contribution to Q4 GDP growth. In addition, recent indicators for the real estate sector have been remarkably strong, with a surge in dwelling approvals to a new all-time high and solid gains in new home sales in the four months to November.
These three sectors of the economy are of central importance, because they are the key alternative growth forces to counter the inevitable decline in mining investment. On that score, we see little reason to expect that the RBA’s view about the pace of decline here would have changed substantially since the most recent Board meeting at the start of December. Last, but not least, recent labor market reports have been stronger than expected, both in terms of employment growth as well as the unemployment rate.
Baader says if the currency was to rise it would impact his view on rates but on that score, he says the combination of moves in the RBA’s trade weighted and commodity price indices mean that “the terms of trade probably changed little in Q4.”
We’ll know if Baader or Westpac is right on February 3 at 2.30pm.