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Academic Gamble on RBA Rate Cut

Discussion in 'The Economy' started by Chris C, 5th May, 2009.

  1. Chris C

    Chris C Well-Known Member

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    I mentioned last week I was doing an assignment on forecasting the RBA's decision on rates today. In this assignment we had to write the media release that Glenn Stevens would release later today, I thought I would share the introduction I made in my assignment:

    So now I'm obviously sitting here sweating over whether I made the right call, and my grade obviously depends on it...

    I knew at the time predicting a 25 basis point cut was definitely the riskier option than leaving rates the same, but I just felt that because the market has been recovering and there have been a few "green shoots" with reference to slightly increasing sentiment from both consumers and businesses both domestically and abroad doesn't negate that the more influential data (at least in my opinion) just seemed to support further reduction in rates.

    That said, looking at the way the AUD is strengthening I'm getting pretty worried the market, and probably the RBA is feeling sentiment move towards keeping rates unchanged...

    :(
     
  2. AsxBroker

    AsxBroker Well-Known Member

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    Hi Chris,

    After the RBA getting it wrong in early 2008 by increasing rates, they are probably quite wary about moving interest rates too far from the average (5%?). There may be more rate reductions but we are certainly towards the lower end of the cycle with 4.25% cuts. Also another reason may be because of next weeks budget which may change things.

    Cheers,

    Dan
     
  3. Chris C

    Chris C Well-Known Member

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    Yeah through out my research there were lots of comments how the RBA doesn't like to cut rates around budget time because they never know what dumb vote winning curve balls the government are going to through out there...

    I knew opting to suggest they would cut by 25 basis points was always a bigger gamble than opting for rates remaining unchanged. I just figured that there was too much data out there that was suggesting things weren't getting better fast enough, and given the reasonably long lags for monetary policy to take effect I thought they might try and give the impending recovery a bit of a boost.

    That said I don't think too many central banks around the world are too worried about over stimulating their economies at the moment, as the deflationary risk is much greater, and with our CPI figures only recently reporting a substantial drop back to 2.5% made me think at this stage if we are not careful Australia is still at great risk of seeing a year over year deflationary SPI figures itself...

    That said the RBA at this stage obviously has a bit of time up their sleeves to see how things play out a bit more, and all in all 25 basis point was going to make a huge difference to the already large monetary stimulus begin to play out in the economy, but that said I don't think we have seen the last of the rate cuts.
     
  4. joanmc

    joanmc Well-Known Member

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    Hi Chris
    So how did they end up marking you? It hopefully wasn't a huge percent of total mark for the semester? Good luck with the study (economics bored me S**tless at uni)
    Joan
     
  5. Chris C

    Chris C Well-Known Member

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    I got 16 out of 20, and it counted for 20% of my grade so it was reasonably significant. All in all I'm very happy with my result given that I asked my professor and he said they took off 3 marks for the wrong forecast and the rest of the marks went towards how you went about justifying your forecast.

    So they obviously thought I justified the case for cutting rates fairly well, which wasn't hard to do given the world climate.

    :eek: Blasphemy!
     
  6. joanmc

    joanmc Well-Known Member

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    LOL:D
    I was doing a double business major in Law and Public policy:eek: BORING.
     
  7. Chris C

    Chris C Well-Known Member

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    I defintely detested public and regulatory policy economics. It's very big business - but boooorrring!