Chief economist update: The Grinch steals Christmas

The Reserve Bank of Australia (RBA) disappointed no one when it kept the official cash rate unchanged at a record low 0.75% after the conclusion of its December 3 meeting.

This is perfectly rational: Monetary policy operates with a lag - it takes about 12 to 15 months for higher/lower interest rates to flow through into the general economy; the RBA exudes optimism with its statement "the Australian economy appears to have reached a gentle turning point" - backed up by its 2021 central scenario for the economy to grow by 3%, the unemployment rate to improve "a little below 5%", and inflation "expected to be close to 2%".

The RBA's optimistic outlook is predicated on the "low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices and a brighter outlook for the resources..."

Speaking of which, these are the same parameters and predictions printed in the Statement of Monetary Policy (SoMP) and Governor Lowe's statement in November; the time when I pointed out that the fine print in the SoMP's forecast table contained a footnote explaining that the technical assumptions "include the cash rate moving in line with market pricing".

Markets are currently pricing another rate cut by February 2020.

This suggests that the RBA expects to get to its 3% GDP growth; 5% unemployment rate and 2% inflation by cutting interest rates one more time ... at least.

This, too, is predicated on the RBA's sanguine view of the global economy: "While the risks are still tilted to the downside, some of these risks have lessened recently."

But even more recent than recently, is Trump's recent declaration restoring tariffs on US steel and aluminium imports from Argentina and Brazil, considering imposing 100% tariffs on French products; and, suggesting that the US-China deal could wait until after the 2020 elections - meaning that the proposed 15% tariff on US$160 billion worth of Chinese imports would be slapped as threatened.

Argentina and Brazil may have to kowtow to Trump despite their currency depreciation being a result of the economic crises in their economies and not currency manipulation but China and France have the firepower to engage the Grinch who is stealing Christmas.

The point is contrary to the RBA's view that the global economic risks have recently eased - well, they have until the day of the RBA's Board meeting - the risks have escalated anew.

Some say that it is Trump's ploy to get whichever country is on the other side of his bargaining table to give in or make concessions to his demands. But the certainty of Trump's uncertainty means that financial markets and businesses would forever be second-guessing his next move, er, tweet.

Perhaps it could be Trump's way of proving his genius on his latest call on the Fed to "Lower Rates & Loosen".

The escalation of trade tensions is already sending Wall Street on a tailspin, and just like December last year's rout on Wall Street prompted the Fed to pivot - from a pause to an easing - it would find it difficult not to "Lower Rates & Loosen" some more.

This will have a flow on effect on Australia. The RBA would have to cut interest rates here by more than the bank's predicted single 25 bps reduction next year to keep the Australian dollar from appreciating versus the greenback.

RBA Governor Lowe has already stated that 0.25% is the lowest the official cash rate could go. Quantitative easing here we come!

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