The May 2019 RBA Cash Rate decision & the random predictions of economists

The RBA very sensibly chose not to lower the cash rate at their meeting on 7 May 2019. 

Of course it remains to be seen whether they will be conned into making a cut later this year by those who believe they can micro-manage the economy to an absolutely ridiculous degree.

I have been arguing for some time that another rate cut is not required and I won’t repeat those arguments again here, but I thought it would be interesting to take a close look at which economists (at major financial institutions) got the rate call correct and who got it wrong.

The following information (sourced from Bloomberg) shows who passed and who failed:

 

Economist	Firm	Estimate	Pass or Fail?
Shane Oliver	AMP Capital	1.25	Fail
David Plank	ANZ	1.25	Fail
Tony Morriss	BAML	1.5	Pass
Rahul Bajoria	Barclays Bank	1.5	Pass
Marcel Thieliant	Capital Economics	1.25	Fail
Joshua Williamson	Citigroup	1.25	Fail
Michael Blythe	Commonwealth Bank	1.5	Pass
Philip Odonaghoe	Deutsche Bank	1.5	Pass
Paul Bloxham	HSBC Bank Australia	1.5	Pass
Rob Carnell	ING Bank	1.25	Fail
Sally M Auld	JP Morgan	1.25	Fail
Stephen Roberts	Laminar Capital	1.5	Pass
Justin Fabo	Macquarie Group	1.25	Fail
Stephen Koukoulas	Market Economics	1.25	Fail
Chris Read	Morgan Stanley Australia	1.5	Pass
Michael Knox	Morgans	1.25	Fail
Kaixin Owyong	NAB	1.5	Pass
Andrew Ticehurst	Nomura	1.25	Fail
Matthew Peter	QIC	1.25	Fail
Su-Lin Ong	Royal Bank of Canada	1.25	Fail
Klaus Baader	Societe Generale	1.5	Pass
Besa Deda	St George Bank	1.5	Pass
Chidu Narayanan	Standard Chartered Bank	1.5	Pass
Annette Beacher	Toronto Dominion Bank	1.25	Fail
Bill Evans	Westpac	1.5	Pass

As you can see, when the decision that the RBA has to make becomes difficult, the economists’ predictions become sheer pot luck. Of the 25 economists listed above, 13, or just over half, got the call wrong. You could have flipped a coin and obtained a similar outcome.

As Pepperstone’s head of research, Chris Weston stated in an AFR article on 8 May 2019: 

As it turned out, the central bank not only held rates steady, but those who had been betting on a rate cut were not even supplied with more tangible evidence the RBA was considering an imminent move. As a result, traders positioned for a cut would have been "absolutely destroyed".

Any of the institutions shown above that actually traded on the advice of the economists (who were wrong) would certainly have lost money.

A special mention to Shane Oliver at AMP, Sally Auld at JP Morgan and Su-Lin Ong at RBC – you were all completely wrong but were all over the media talking your own book. Well, hopefully it’s a case of “once bitten, twice shy”.

David Plank at ANZ must also be feeling like a real loser - his counterparts at the other three big banks got the call correct.

As the very astute Christopher Joye of Coolabah Capital stated in the AFR of 3 May 2019:

Earlier in the week I revealed that APRA and the RBA were sensibly considering cutting the minimum interest rate banks apply when working out how much they will lend to a borrower from 7.25 per cent currently to 6.25 per cent, which would instantly increase borrowing capacity and purchasing power by about 5 per cent.

This is actually a vastly better solution than lowering the cash rate further. The RBA should also revise down its antiquated inflation targets and hold fire for real emergencies, like a recession. It also needs to completely ignore the opinions of celebrity economists, and at least this time, it has.