There’s a couple of articles floating around this morning suggesting the RBA shouldn’t cut, following Warwick McKibbin’s spray on Saturday.
With all due respect to all concerned, baloney.
The RBA has four goals. The first is to maintain price stability and core inflation is well within in its 2-3% band at 2.6%.
The second is to sustain full employment and the labour market is sliding. 2011 was the worst year in over twenty years for job creation and the second half was much worse than the first. December’s ABS job numbers, ANZ and DEEWR vacancies, as well as sustained weakness in the employment component of the NAB survey all point to further job losses. Roy Morgan’s January numbers show weakness accelerating.
The third is financial stability. In the past month, there’s been a tightening in spreads for bank wholesale funding as the ECB’s LTRO works its way through global markets. But the bank schedule of refinancings remains large and profitability also clearly under pressure. A new rate cut will do stability no harm and may be needed to prevent the banking interest rate hydra tearing off its pound of flesh.
The RBA’s fourth goal is currency stability, which they seem to have abandoned in view of the first three. But even the adjustment-loving RBA can’t be so enamoured of the containment effects of a high currency to want to see AUD1.20. If they don’t cut, it’s AUD to the moon all the sooner.
As for the global context, it’s far too early to think we’ve escaped the worst of the economic slowdown emanating from China and Europe. China has had one round of stabilised PMIs showing zero growth but faces very serious headwinds in its determination to pop its nascent housing bubble. North Asian PMI’s have bounced to zero, not growth. Europe’s PMI’s are similar but the settings there are for perpetual recession and the threat of a Greek default looms. The US has had a mini-bounce the durability of which is questionable. Stock markets can bet on all of this being a recovery but it’s a central bank’s job to ensure it.
On the local risks side, there are very few signs of a rebound in credit. The RBA can cut again without fear of a rush to mortgage debt, especially since, it ain’t gonna get passed on in full. And that’s the final point. if it does not cut, the RBA risks a de facto tightening by the banks and in the currency.
To be honest, if you’re not going to cut tomorrow, I’m not sure what monetary policy exists to do.
