Let’s check out how many ‘experts’ think that the RBA will raise the interest rate curtain.

What follows is guesswork about something that will happen eight times this year. Guess what it is? Yep, it’s the Reserve Bank board’s interest rate meeting. And today, the money market experts have the chance of an increase at 72%.

While all four big bank economics teams think a 0.25% rate rise is on the cards, these highly trained number crunchers have been wrong before. AMP chief economist Shane Oliver and his colleagues are backing no change. This is what Shane wrote on the weekend: “We think the RBA will probably hold. On balance we think that, given the cross currents and in particular the downtrend in trimmed mean inflation, the RBA should and probably will leave rates on hold and wait for more information. But it’s a close call and not one we have a lot of confidence in. We would put the probability of a hike as being around 49% versus 51% for a hold. If there is a 0.25% hike, given the above considerations, we would see it as a case of being one and done. In this context, money market pricing for a 66% chance of a hike on Tuesday is too high – 51% would be more reasonable! – and the pricing in of more than two rate hikes is a bit too much.”

Oliver is at odds with the majority on what the RBA does today and here’s why:

1. The monthly trimmed mean inflation number has progressively trended lower from 0.47% month-on-month in July to 0.23% in December.
2. The quarterly trimmed mean fell from 1% in the September quarter to 0.9% in the December quarter.
3. He expects this trend to continue and thinks RBA modelling will be saying the same thing.
4. Business surveys show output price indicators running around levels consistent with the inflation target.
5. Consumer spending is likely to take a hit if we go so quickly from rate cuts to hikes, as mortgage stress likely remains high.
6. The rise in the Australian dollar is a de facto monetary tightening that will help lower imported inflation.

These are pretty compelling reasons why the RBA board should think long and hard about a cash rate hike today. But what’s the other side of the argument?

Shane looked at these and came up with:

1. All key measures of inflation are now well above the target of 2%-3%.
2. The December quarter trimmed mean is above what the RBA was forecasting last November.
3. Services inflation edged up in the December quarter.
4. Goods price inflation is well up from its lows.
5. The gap between the proportion of items seeing price rises above 3% year-on-year and those seeing less than 2% year-on-year widened further.
6. Unemployment has fallen from 4.4% in September to 4.1% in December meaning the economy looks like it’s getting stronger, not weaker, which would have been a reason for no rate rise.

While this does suggest the RBA could err on the side of caution and wait another month or two, most economists are leaning towards a rise. This was a survey of prominent economists from abc.net.au:

• Nicki Hutley: Rise

• UNSW’s Richard Holden: Rise

• CEDA’s Cassandra Winzar: Rise

• William Buck’s Besa Deda: Rise

• Monash University’s Robert Brooks: Hold

If unemployment hadn’t fallen to 4.1% and the December quarter inflation numbers generally were steady rather than higher, I think the RBA would have been keener to hold. But the case to scare spending Australians and to stop price-setting businesses from raising prices will be an important argument at the board meeting today.

Shane Oliver makes a number of good points. I hope the RBA does continue a wait-and-see approach, because like me, they might not trust those ABS job numbers. But my gut feeling is that the big bank will raise today.

Undoubtedly, the mortgage belt has been feeling the pinch but older Australians with either no mortgage or a small one on valuable properties and ballooning super may well be the greatest contributors to inflation. They’re neither in debt nor are they feeling the RBA’s squeeze on their bottom lines via interest rates.

In fact, a rate rise will increase term deposit rates, which will be a plus for those very same people, who enjoy higher interest rates on their investments.