Monday, 28 November 2011

MYEFO - A quick post mortem

There were few shocks in the MYEFO statement, other than perhaps the size of the revision to the Budget numbers in 2011-12. Given that that year is five-twelths over, there is or was precious little the Government could do to influence that result to any significant extent, even if it wanted to.

There were no surprises in the economic forecasts - all on par with the general consensus at the moment, so here's hoping they are, at worst, correct or preferably, there is a bit of upside in the next 18 months.

Fiscal policy is now set in stone for the next six months. The boffins at the RBA and elsewhere can prepare their growth and inflation forecasts with firm knowledge of the influence of public demand on those forecasts.

The only policy game in town for the next 6 months is at the RBA. Any whiff of softer growth from current expectations and rates cuts can be delivered without fear or favour. We may even see an odd 50bp cut at one meeting if global conditions deteriorate further.

From a local data perspective, the extent and timing of the interest rate cutting cycle will be driven by inflation and employment results. This is where my baby, the TD-MI Monthly Inflation Gauge will be useful for the RBA in that it will give early signals on inflation pressures, ahead of the release of the official CPI. The Gauge for November is released on 5 December. The job vacancies and job advertisement series are pointing to further rises in unemployment. As this unfolds, wage pressures will be further contained, from an already low starting point.

I still reckon the RBA will be cutting the cash rate to around 3.5% in the middle of 2012, a point only reinforced by today's MYEFO. The data over the next 10 days will as always be useful in building the case or otherwise for that scenario to unfold.

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