From the AFR:
A key business group has called on the Reserve Bank of Australia to announce a half a percentage point rate cut after data on consumer confidence and housing finance added to evidence the economy is growing below trend.
The Australian Chamber of Commerce and Industry said on Wednesday the RBA should cut rates by 0.5 of a percentage point, rather than just 0.25 of a percentage point, in May.
“The time has come for Australia’s central bank to move decisively to cut rates by a full half a per cent, and for the retail banks to immediately pass it on,” ACCI said in a statement.
“There needs to be a significant and unambiguous signal, to support activity and to lift confidence across the next quarter.
“History shows that delays or timidity in adjusting monetary policy when structural changes like the high dollar and lower competitiveness are embedding themselves in our economy have costly repercussions for business viability and jobs.”
Australian Workers Union secretary Paul Howes also said on Wednesday that the RBA had “criminally misread” the economy and should cut rates to drive down the exchange rate and help local manufacturing.
So, is the RBA’s credibility at risk? Nope, not to my mind. It may have misread the economy in the past few months or it may not have. Remember, this screaming of the interest rate sensitive sectors was entirely foreseeable in Australia’s interests-driven economy, as I wrote last September:
It is one thing to be raising interest rates, or threatening to, when jobs are raining from the heavens. You’re an economic warrior then, gleaming with righteous sweat as you hike the monetary mountain and slay the inflation dragon.
But what about when jobs start drying up, which is where we are now? A whole series of indicators have shown a turning point in the labour market has already passed and an increasing number of private banks are forecasting unemployment rises to 5.5% and even 6% next year. What happens when the RBA straps on its gauntlets and announces its intention to defend the “adjustment” to mining led growth when the peasants are starving? Then heroism starts to look like tyranny (again, no judgement intended).
I’ve been calling for rate cuts this year too. But I’ve had the luxury of doing so with one caveat. I’ve been able to say “yes, we need rate cuts but we also need to use macroprudential policy to prevent those cuts from turning into more mortgages”. The reason why is simple. As I wrote last week on falling rates:
There are several possible outcomes. The dollar will fall and, assuming world growth remained on track, imported inflation pressures would rise. That’s not necessarily a problem, though. There may be enough deflationary pressure emanating from the Budget cuts, which could force further household retrenchment.
The upside from the dollar falling is that exporters will no longer have to take the brunt of the adjustment to mining led growth.
So one possible outcome is that we shift the burden of adjustment further onto the household sector.
But that may not happen. Despite the budget cuts, lower rates may, rather, trigger a renewed desire to borrow, especially to speculate on houses. If that happens, then we’d enter a nice little mini boom, that would last a few months before either the RBA or ratings agencies snuffed it out. Why? Because inflation risks would quickly rise and/or it would cause the rush of deposits into the banks to dwindle and offshore borrowing to resume. I can’t see foreign creditors celebrating that.
The RBA does not have the luxury that I have of speculating about what should be done. It could with APRA raise capital and lending standards as it cut rates but that would be a radical departure from policy, whether or not I think it is a good idea. But without such innovation it is stuck with the blunt tool of monetary policy and in those circumstances it has had, and still has, very good reasons to not cut interest rates. The principle one being stability of the banking system.
Those interests calling for rate cuts show little sign that they understand the risks.
