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the start of the year, overall credit growth remainssubdued and the housing market remains soft”.Nonetheless, he did not sound like a man arguing fora rate cut at the next RBA meeting.We would, however, add a number of other points toMr Battellino’s list of weak areas of the economy,which could be used to justify a rate cut beyondNovember. For example, consumer confidence is stillwell below average, business confidence is on thesoft side, and, while the US is doing a little betterthan expected, European growth looks notably worse.Insurance policyWhile recent debt-related developments in Europeand some better news on US growth have led tostronger sentiment in markets, it is worthremembering that the global economy has suffered anegative shock from financial market volatility, whichis still likely to be feeding through to the realeconomy. Aggressive RBA rate cuts, as priced in bythe market, continue to look inappropriate. But in lightof improved Australian inflation data some modestpolicy easing to guard against downside global riskswould seem sensible.Deputy Governor Battellino’s commentary suggests amove at the 1 November meeting is not the mostlikely scenario. We therefore continue to expect a25bp cut in December. Why would the RBA cut inDecember but not in November? Because it isanother month in which we expect to see below-paractivity data in the US, Europe and to some extentAustralia in response to the shock to financial9.008.007.006.005.004.003.00%Chart 6: …And Scope to CutRBA Cash Rate2.001993 1995 1997 1999 2001 2003 2005 2007 2009 2011Source: Reuters EcoWin Pro, BNP ParibasAverage Cash Rate1993-2007Effective Cash Ratemarkets in recent months. And, perhaps moreimportantly, failure to act in December will mean theRBA would have to wait until February to react to anynegative surprises. The now benign outlook forinflation gives the RBA the ability to take outinsurance against such a scenario by moving thepolicy rate back towards neutral from its current,mildly restrictive, stance (Chart 6, the effective cashrate takes into account the wider spread on mortgagerates since the crisis, and is above its average level).In sum, having been one of the first houses toforecast an RBA rate cut, we are now in the oddposition of arguing that it will come later than themarket and the consensus expected. Moreover, thegreater risk to our forecast is that policy easing isdelayed into 2012, rather than delivered on1 November.Dominic Bryant 27 October 2011Market Mover27www.GlobalMarkets.bnpparibas.com