More evidence the RBA should not hike in October

Based on our assessment of the current settings in the Australian economy, based on our assessment of the pressure under which Australian households are labouring and based on our assessment of where global growth is going we believe it is inappropriate for the RBA to hike interest rates in October.  Today's credit data and housing price data shows just under what pressure the Australian consumer/household sector is under at the minute. There is no doubt that there is a crash in demand for housing finance which, as a proxy for physical housing demand, will ultimately help prices adjust lower due to falling demand and with Australian household wealth flatlining, as noted by the RBA in the Financial Stability review today, this weakness is a really important counter balance to the mining boom.

We feel strongly that the operation of the RBA in September was a talkfest aimed at redressing an imbalance of expectations which saw markets pricing a rate cut to an outlook that better reflect their ongoing tightening bias.

We believe that in a rush to ensure that they get their point forecast right on the next RBA’s meeting that market pundits have let themselves be deceived by their own rhetoric rather than that of the RBA. Specifically in Governor Stevens speech of September 20^th he said the following:

“Often, the expectation of what will happen to the cash rate in the future is just as important as, or even more important than, the level of the cash rate today. For this reason what the Bank says – or what people think we have said – can be very influential on markets and behaviour. It is for this reason that central bankers are usually so guarded in public comments.” Our bolding.

That is we, the RBA, jaw bone sometimes. That is what we think has happened over the last month.

We do appear to be in the minority however  suggesting the RBA should and will leave rates where they are next Tuesday given we think there is much pressure on the economy already.  Now, we have often said we believe that the RBA is the best central bank in the world and with two decades of uninterrupted growth in the Australian economy there is much evidence to support this. But they are not infallible and if they hike we simply believe it increases the chances that rates will be lowered in late 2011.  The AUD is pushing hard on the top of a really strong uptrend. We like it higher eventually but we might be seeing the top for this run.