From Saul today:
Bank of America Merrill Lynch’s Australian economist Saul Eslake says further cuts to the cash rate, after the Reserve Bank of Australia’s first reduction in 18 months early in February, “may be relatively ineffective in directly stimulating improved levels of activity in the economy over the short term”.
He is also the latest to warn that cheaper credit is failing to revive so-called “animal spirits” among business investors and will do little more than fuel house price inflation.
Mr Eslake predicts an increase in the median national dwelling price from an average $469,000 to $497,000 by the end of this year.
…”Indeed, on the majority of measures and metrics Australia’s household debt level is already high compared to our own history and other developed nations,” he said.
Right you are, Saul, and thank God somebody is talking about it. But how about also discussing APRA and macroprudential? The falling dollar is a huge stimulus if it gets low enough. Only APRA can ensure that new rate cuts energise a falling currency rather than rising house prices.
Saul is a part of the Shadow RBA and from The Conversation another member, James Morley, defends it against charges that it has mostly been wrong on official meets:
I am a member of the “Shadow” RBA Board, which is made up of a collection of industry and academic economists. Just before every meeting of the real-world RBA Board, we announce our recommendations for monetary policy.
Prior to the February meeting, we argued that RBA board members should hold the policy rate steady at 2.5%. But they cut the rate for the first time in 18 months to 2.25%. This was a surprise to many, including financial markets which responded with big gyrations in the dollar and equity prices.
So did we, like many others, simply get it wrong?
Not really, because a key distinction between the Shadow Board and many market commentators is that we are supposed to recommend what the RBA should do, not predict what it will do.
Of course we hope that the reasons behind our recommendation are so compelling that the RBA would come to the same conclusion, even if it does not directly follow our advice. So this distinction between what it should do and what it will do gets blurred somewhat in practice.
Fair enough. Only one issue. The Shadow RBA does not discuss what the RBA should do. It does what Saul is doing today, it only discusses whether the RBA should raise or lower interest rates, and that is too limited a discussion.
In its recent decision, the RBA openly stated it is relying on APRA to control house prices as it cuts rates, yet the Shadow Board is yet to even engage with the macroprudential debate, instead pointing repeatedly at house prices and pretending that APRA doesn’t even exist.
All of these economists need to bring the heat to APRA. Make them act!
