The visible hand in economics

July 08 OCR reveiw preview

Posted on: July 20, 2008

So on Thursday the Reserve Bank decides whether to cut interest rates or not.  Last I heard the market is pricing in a 56% chance of a cut, while economists are picking a 45% chance (I’m surprised its not 50% 😛 ).

Now I think it is clear from the writing on this blog that I don’t think we should cut – but this preview isn’t about what I think SHOULD happen, but about what I think WILL happen.  Ultimately, I don’t think that they will cut on Thursday – however, the September meeting is looking good for a cut.

There are a number of reasons why I think they won’t cut:

  1. This is the start of an easing cycle.  It is nice to start an easing cycle with as much information as possible, July is a OCR review date, not an MPS date (when they release their forecasts) – as a result, if they cut in July they will be unable to “guide” the market as to the length of cuts they expect to make.  Cutting at the same time they release new forecasts will give them this “guiding” opportunity.
  2. Labour market data is out in August.  Given the fact that inflation expectations are rising and given the length of time that non-tradable inflation has been out of the bag, the Bank will probably want some confirmation that the labour market is easing, before easing themselves.
  3. They will not want to terribly surprise the market with rate cuts because of how close we are to the election – as they want to keep the image of political independence.  Given that July would surprise many market participants but September wouldn’t, it seems a fair bet that they will wait.
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