Rates and Races

While most of us are focusing on ‘the race that stops the nation’, the RBA board are deciding what to do with interest rates before its extended Christmas hiatus.

According to fund manager and economist Christopher Joye, ‘the probability of a cut is finely poised at 57 per cent, well back from over 80 per cent a few weeks ago. Healthy retail trade data in September, and record mortgage approval volumes in October released by Australia’s biggest broker, AFG, push the odds further in favour of a rate hold. The Aussie dollar traded higher on the news.’

There are conflicting messages, as always, coming from several economists. Those in favour of a cut cite concerns about the Australian economy’s slowing, a downwards revision of medium growth forecasts by the central bank and a desire to boost retailers ahead of Christmas.

The RBA recently imposed a ‘media blackout’ from 2.30pm on the Wednesday prior to each meeting through to the decision’s release at 2.30pm on the following Tuesday to prevent decision ‘leaks’.

Concerns about creating an easy money, low interest rate environment, a la Canada and Switzerland, will be the likely factor in producing a hold decision today if one is delivered. Also, Australian household spending has been solid over the last year. According to the RBA, recent cuts were aimed at supporting demand in the second half of 2013 when the resources investment boom is predicted to start tailing off, not delivering retailers a Christmas boost.

AFR journalist Alan Mitchell stated that ‘there is no compelling need to cut for a second month in succession’.

The bottom line is that today’s decision on what to do with rates will be as close to a photo finish as last year’s Melbourne Cup. At 2.30pm today these questions will be answered. It will be a close decision, but a hold seems slightly more likely for mine.

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