HSBC economist Paul Bloxham is out this morning with a note that declares monetary policy fine and well for Australia:
The RBA has cut the cash rate by 150bp in the past year and it is now 75bp below neutral in our view
Low rates are starting to support the interest-rate sensitivesectors of the economy, including housing
Conventional monetary policy still works in Australia, which should see growth rebalance in the coming year, reversing the unevenness brought on by the mining boom
And there you have it. No pesky liquidity traps effecting us. We’re different.
But is it true? Buggered if I know. And I’m not sure why Bloxo is so sure. Here is the counter-argument expressed eloquently in a single Morgan Stanley chart:
No doubt that chart is beginning to roll upwards a little now but you have to ask yourself is it really fair to simply say that rate cuts still work?
Moreover, Bloxo does not really put his argument in context. At Macro Investor, we are of the view that monetary policy is already quite close to an Australian version of a zero bound. We think that the RBA is unlikely to be able to cut much below 2.5% even if it wants to, given we’re a small, open economy with a big current account deficit that needs funding. To completely eliminate the positive spread with other Western nations could prove very problematic.
If that’s the case then we are actually much closer to pushing on a string than the Bloxo note suggests.
Still, as always, Bloxo’s view has evidence and it’s useful for insight into the ultra-conventional case.
121016 Downunder Digest – Australian Monetary Policy Still Works
