Over the last few months, the Reserve Bank of Australia (RBA) board meetings have not provided any real surprises, but coming up next week is the most interesting meeting in a while. The cash rate is currently 4.5%, but there have been enough noises from the bank’s governor and other RBA board members about the strength of the Australian economy, that consensus is leaning towards a rate hike next week. Financial market pricing is currently indicating a 62% probability of a 0.25% rate rise. Interestingly, the online betting agency Sportsbet offers bets on possible RBA actions (somewhat controversially) and its odds are indicating an even higher chance of a rate hike.
| Reserve Bank move | Payout | Probability |
|---|---|---|
| Rise Between 0.01 and 0.25% | 1.33 | 75% |
| Stay The Same | 3.40 | 29% |
| Rise Between 0.26 and 0.5% | 4.50 | 22% |
| Rise 0.51% or More | 21.00 | 5% |
| Any Decrease | 101.00 | 1% |
My own contacts in the markets (you know who you are) tell me that the HSBC economist Paul Bloxham, who recently joined the firm after 12 years at the RBA, is calling for no move until November. So, perhaps a hike is not as sure a thing as Sportsbet punters believe.
What do you think? Here is another chance to pit the collective wisdom of Stubborn Mule readers against both the financial markets and online gamblers!
If you need more information to help you make up your mind, you could read Christopher Joye’s arguments as to why the RBA should just be getting a move on in the fight against inflation. It might help tame property prices in the process. Then again, perhaps not.
UPDATE: there was an error with the calculation of probabilities, which has been corrected. By the way, the fact that the probabilities add up to well over 100% gives an insight into Sportzbet’s profit margin, which looks to be around 25%.
FURTHER UPDATE: Sportsbet’s pages of financial markets bets are down…I wonder if ASIC are on to them now.
Possibly Related Posts (automatically generated):
- Forget the wisdom of crowds! (5 October 2010)
- When is a bet a derivative? (29 September 2010)
- What will the Reserve Bank do this week? (3 October 2011)
- Cash rates and mortgage rates (4 May 2010)
Between Joye and the RBA, it’s hard to decide who has the greatest ability of making mistakes.
For years Joye had being explaining raising housing prices/affordability crisis as:
(1) non-existent,
(2) a good thing,
(3) due to supply constraints,
(4) all of the above,
(5) none of the above,
(6) a convex linear combination of all of them,
(7) anything that sounds good.
Now, suddenly the man wants to use inflation targeting as THE policy to control housing prices. That, in spite that by 2008, 22.5% of households were already spending 30% plus of their household income to cover housing costs (some 8% were spending -by 2008!- in excess of 50%!!!!!), retail sales (including vehicle sales) are stuck, housing prices are already falling, and other signs of impending recession; all of which, according to the ABS.
Plus the AU$ is set to reach parity any moment now.
But I am used to this kind of nonsense from Joye: I can live with that. He’s not dangerous, if you don’t pay attention to him.
What’s impossible to stomach is that the RBA just forfeits their legal responsibility to promote full employment, when 13% of the Australian workforce is either unemployed or underemployed. When people might have started to give up looking for jobs, for Christ’s sake! That’s unforgivable.
You know I have some differences with Prof. Mitchell’s positions. But on this, he’s right on the money.
You’ve just read Anonymous’ post: one of the factors in the housing price boom might well have been taxation. How on earth will inflation targeting reverse that? Does Joye know that there is something called taxes and they may have something to do with housing prices?
Is the Labor government willing to shoot itself, this time not in the foot, but in the big, empty head?
My conclusion: either these people went bananas, or they want to give birth to a revolution. Which may be, in the end, a good thing.
A suggestion: make a poll about the bubble bursting and Australia falling into recession. I hope I’m wrong, I really do.
The interesting thing about Joye’s comments for me is not so much his own track-record, but the observation he makes about the stance of the Reserve Bank. Prior to the global financial crisis, received wisdom among central bankers around the world was that central banks should only try to target consumer price inflation and not asset price inflation, in large part because of the difficulty of identifying bubbles definitively before they burst. The Greenspan doctrine was that you cut rates aggressively to mop up the mess after a bubble burst rather than trying to do anything ahead of time. Even back then, there were plenty of critics of this approach who argued that housing bubbles and other bubbles (e.g. the tech bubble) were greatly exacerbated by the practice of central bankers ignoring them. Consensus began to shift almost as soon as the financial crisis began. The RBA seems to be about the first bank to explicitly change their philosophy on this point. Of course, in Australia, asset bubbles are essentially synonymous with housing bubbles (just about any other bubble would most likely be a global phenomenon and so there would not be much scope for the RBA to affect it).
As for a poll on the bursting of a housing bubble in Australia, the tricky thing (as is always the case for any bearish view) is to set a time-frame in which to see prices fall back down. There’s not much fun in a poll with no deadline.
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Short Chris Joye, Long Paul Bloxham next time…
Joye looks like he was right about his rates call, just one month too early.
The banks will use the cover of the Melbourne Cup to raise interest rates to reduce the amount of media coverage outrage.