Wry & Dry

CPI goes backwards!

Good grief.  A negative quarterly CPI has occurred only 10 times since records began in 1948.  That's 10/270 = 3.7% of the time.

So, W&D and readers are looking at a rare event.  So is the Chief Teller at the RBA.

Many economists have nailed an interest rate cut next Tuesday to the mast of A Sure Thing.  W&D is not so sure, for four reasons.

Firstly, assuming the RBA is smart, it will wait until after the Budget, so as to assess the amount of fiscal stimulus (or contraction) within it.  Cutting monetary policy to stimulate the economy at the same time the government loosens fiscal policy might ignite unwanted fires.

Secondly, the economies of each of New South Wales and Victoria are showing signs of strength.  Maybe the economy is in better shape than thought.

Timm Pallas

Victoria's Treasurer enjoying the largesse of others (Mark Knight, Melbourne Herald-Sun)

(Although W&D continues to be amazed how a state premier can take the credit for the billions coming in from stamp duty driven by house purchases from China.)

Thirdly, much of the CPI fall was driven by the effect of the lower oil price.  Would the RBA, nowadays, do the reverse and put up interest rates if the price of oil went up sharply?  Nuh.  

Fourthly,  the banks are unlikely to pass on in full any cut in official rates.  The reasons are: (i) they cannot cut deposit rates much lower as depositers are fleeing the banks and they need deposits so they are less reliant on foreign debt; and (ii) the banks want to increase their falling profitability.   

The result, W&D encouragingly predicts, is that Treasurer Jim Morrison's Budget will not be dwarfed by an RBA announcement.