One of the joys and mysteries of writing an economics blog is that you get stuff off your chest through the chance to skewer poor analysis but often wonder if those responsible actually read you. Well, today we have our answer in the case of Herald Sun legend, Terry McCrann, who, in his post RBA analysis today, picks especially upon MB (unnamed and unlinked as usual):
Now this is not just a cheap shot.
Because the suggestion that 50 points really was a surprise threatens to generate dangerously misleading comments about where we are headed.
Indeed it already has done. One economic blog headlined its post on the rate announcement: “RBA hits the panic button.”
The RBA did not hit the panic button. It does not believe the economy has gone or is heading over a cliff.
It has made a deliberately modulated and entirely appropriate shift to rates based on evidence that both inflation and activity is less than it previously anticipated.
Welcome Terry, nice to know you’re reading. In fact, your argument kind of reminds me of one of my own made last year:
As the bullhawks (Joye & Carr) withdraw to their high eyries, dragging the bloodied corpse of Terry McCrann with them, they should take a moment to raise their razor sharp beaks a few points above the strictures of yesterday’s war. Strict adherence to an inflation band is sensibly modified by an appreciation of imminent risks, whether that is the immediate danger of a Western recession, so apparent in global PMIs, or it’s the home grown vulnerability of a lurching housing bubble.
Let’s face it, we’re playing semantics here. I titled yesterday’s RBA release post as Pushing the panic button because to me it represented an incredible turnaround in the bank’s thinking culminating in a 50bps cut that is traditionally reserved only for emergencies. Mccrann has offered nothing to persuade me otherwise:
If the RBA is to be criticised, and in the scheme of things it’s a very marginal criticism, it should have cut by 25 points a month ago, and then it would have got to the 50 points with a second ”unthreatening” 25 points yesterday.
…Still, why did it have to be 50? That’s where the – rather basic – arithmetic comes in.
Since the last official cut in December, the banks had unilaterally raised their rates by 9-11 points.
They would keep at least 5-6 points of the next cut; so 25 points off the official rate would mean in real terms, relative to December, perhaps just 10 points or so. Perhaps even less.
So 25 points would have been pathetic and pointless. Especially when inflation subsequently came in so low last week.
But why not spread it over two 25s, this month and next?
Simply, the economy needed 50 points – perhaps 35 points in real terms – and Stevens and the board were going to do what was needed, not what might paper over their (marginal) miscall.
As we know, conventional (and RBA) wisdom is that shifts in monetary policy take a minimum of six months to impact the economy, so I can’t help wondering why there was such a hurry to cut 50bps? I agree with Terry that the RBA has only been wrong for a couple of months, as I wrote on Monday, so why risk folks quite rightly interpreting a 50bps cut as some sort of emergency move (which it always has been before)? Doing so smells of panic to me.
Anyway, Terry, nice to know you’re reading. Might help you dodge hoofed raptors in the future.
