The RBA is expected to make history today

Cut shot by England against West Indies during Test match in Grenada. Photo: Getty Images

The RBA is widely tipped to cut rates by a quarter percent to a new modern-day low of 2% after its board meeting today. The announcement will be made and a statement released by the Governor at 2.30pm, Sydney time.

But, even though it’s widely expected the RBA will ease monetary policy again today that doesn’t mean it’s a slam dunk.

This time last week the market was thinking a rate cut was a line-ball decision based on the recent flow of data. But then we got what has been widely seen as an “official leak” in the media and pricing has swung back towards easing.

That makes this a somewhat more contentious meeting for the markets – for traders at least, if not economists.

The reason is that the data flow that drove the move toward a line ball view of traders. Strong employment growth, improved NAB business conditions, especially trading and profitability, surging Sydney housing prices, strong building approvals and a 0.7% print for retail sales in March all give the impression that the economy is on the mend even if still on a ‘sub-trend’ groth rate at the moment.

It led NAB chief economist Alan Oster, and his colleagues in the markets and economics team, to change their call to no move in May. They have however retained an easing in their forecasts for later this year.

The improved data flow even gave ANZ chief economist Warren Hogan cause to temper his enthusiasm slightly for his own call of an RBA rate cut today, after the release of the Job Ads series yesterday.

Hogan summarised both sides of the argument perfectly noting that a cut is needed because of:

soft business and consumer confidence, a negative outlook for non-mining investment, and likely further job losses across mining and manufacturing.

But you can also sense a turn in his outlook for the Australian economy given he added:

A more positive starting point for the labour market, a re-acceleration in investor housing credit and RBA comments that monetary policy is less effective than it has been in previous episodes, cause us to acknowledge that a cut in May might be a line-ball call

The point about RBA comments on the efficacy of further rate cuts is an important one. Speaking in New York recently RBA Governor Glenn Stevens had a strong message to Australia’s political class. He noted that:

Too much weight is being put on monetary policy to try to achieve what it can’t: a durable and sustainable increase in growth, in an environment where private leverage is already rather high or even too high.

He followed that up just last week with comments which indicate he recognises cuts in interest rates have other impacts aside from simply reducing the burden on borrowers. Cuts also impact savers.

I’m persuaded by the data flow and believe the RBA can and will wait another month to judge whether or when to use what is increasingly looking like the last bullet in its gun. But, none of this has persuaded most economists who believe the RBA will cut rates today. In fairness it was only market pricing which was impacted by the SMH article last week. Most economists were already calling for a cut today.

Indeed most economists who don’t believe the RBA will cut today still believe an easing bias and more cuts are needed in Australia.

So as contentious as this decision today might have become the reality is that no one will be surprised.

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