Well…probably not. But spare a thought for HSBC’s Paul Bloxham, who, having predicted an August rate rise all year, and only pushed out his predicted timeline for a hike a week or more ago, suddenly finds his fellow bullhawks (Joye and Carr) taking to the higher atmospheres, screetching for an August move.
This morning he is out with a note confirming his view that August RBA meeting will not see a rise and his reasoning for why is rather resonant with the views expressed at this site, if a little less detailed.
Inflation is still the focus
As we have been saying for some time now, the medium-term case for higher interest rates remains in tact. This week’s CPI provided further evidence supporting that case. The Q2 CPI data showed that the pulse of inflation is on a solid rising trend, with the RBA’s two preferred underlying measures above the target band in quarterly terms for two consecutive quarters (around 3.6% annualised in H1) (Chart 1).But this is history. The key question for a forward-looking inflation targeting central bank is: how do these numbers and other recent events change the inflation forecasts? And, there are currently forces pulling the CPI forecasts in both directions. On the downside are: the lower domestic GDP forecasts (due to weak coal exports in Q1); weaker domestic sentiment; a weaker non-mining sector; a stronger AUD; and, a weaker world economy. On the upside: the starting point for the CPI is higher than expected; and, the underlying momentum in inflation is building.
On balance, we think the RBA will leave their forecasts unchanged, with underlying CPI to get to the top of the band (3.0%) by end-2011, stay around that level through 2012, and rise above it in 2013.
The case for rate rises is solid. In a normal state of the world, this would be enough to motivate a hike. But the world is currently full of tail risks. And, as the RBA Governor is fond of saying, monetary policy is set with the principle of ‘least regret’ in mind. We think the ‘least regret’ approach implies steady policy next week, to let the smoke clear.
What smoke? Two main things: to determine if recent weaker domestic business and consumer sentiment is temporary or something that genuinely impacts economic activity; and, to allow some of the global risks to resolve. Indeed, the looming deadline to lift the US debt ceiling is, inconveniently, only a few hours after the RBA makes it cash rate announcement, but a few hours before a policy change would be implemented the next morning. Lifting rates in that window may be risky if things don’t go so well in the US.
We think they hold next week, but stay ready to pounce. We expect a hike in Q4.
Welcome aboard, Paul. I think.
