RBA has 'fascination' with November moves

by Ben Abbott31 Oct 2011

A leading economist has told PLAN Australia brokers the RBA is most likely to cut rates when its board meets tomorrow, due to 'benign' inflation data, rising unemployment and an uncertain global economy.

Speaking at PLAN Australia's national conference held in Darwin last week, BT Financial chief economist Chris Caton said that the balance had shifted back towards a rate cut tomorrow as downward economic pressures mount.

"They seem to have a peculiar fascination with the month of November," Caton said of the RBA board.

"They have moved rates in each of the past five Novembers. Outside of November during that period, they have moved rates in less than a quarter of those months - so 100% in November, and less than 25% everywhere else."

Caton said that this was as a result of timing, as well as any data impetus for a move. If the RBA was to miss November, a December move would be too close to Christmas, and the next scheduled meeting is in February.

"If you miss November, you are looking at February," Caton said.

A 'benign' underlying inflation rate of 2.5%, on top of rising unemployment and continued global economic woes mean a reversal of a previous RBA stance that signaled a rising cash rate, according to Caton.

"In May of this year the Reserve Bank sent a very explicit message, which is very unusual. In May this year they told us expect three more rate rises between then and the end of next year."

Caton said this message was based on a then almost full employment of 4.9%, as well as expectations of continued above target band rises in underlying inflation, largely because of the mining boom.

"In early August the Reserve Bank came this close to raising rates," Caton said.

However, Caton has wagered the RBA has a two thirds chance of cutting rates tomorrow by 0.25%, which would bring the cash rate down to 4.5%. He said this may be the first of "a couple" of cuts.

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