It’s getting interesting. With today’s RBA meet, Warwick McKibbin is warning again of the distortions resulting from low interest rates:
“Trying to raise demand from cutting interest rates does not induce investment, especially when weak confidence driven by political incoherence is a driving force in the current Australian economy,” Professor McKibbin said.
…A group of prominent economists, who have formed a so-called Shadow Board which critiques Reserve Bank decisions, have maintained their call for official rates to stay on hold, but conceded rates may need to be lower in six months’ time.
Professor McKibbin, who sits on the board, said while there were clear signs that the economy was shifting away from the resources investment boom, cutting interest rates further would “do more to misallocate capital than they will stimulate demand”.
“Fiscal policy through tax changes and infrastructure spending, and direct reforms to enhance productivity will do more to rebalance the economy over time than monetary policy can,” he said. He warned against using monetary policy to fill the economic “void”, particularly with official rates already at record lows. “Low interest rates are driving asset prices higher than fundamentals,” he said, pointing to recent gains in house prices.
There’ no denying that. Why do I remain sanguine? I’m not. But I just can’t see the misallocation running very far. Credit is barely growing and the forces bearing down on it are epic. I see the current moderate flush of activity as a bull trap.
Meanwhile, the Shadow RBA Board is splitting with Paul Bloxham, Saul Eslake and Bob Gregory calling for a cut. Warwick McKibbin, James Morley, Mardi Dungey, Mark Crosby, Jeffrey Sheen and Mark Thirwell do not want more easing:
Advertisement
Economic Outlook Slightly Weaker in the Near Term
The outlook for the global economy continues to look uncertain; it appears as though only the US economy has potential to surprise on the upside. The domestic economy is showing minor signs of weakness, with the unemployment rate edging up and CPI inflation currently well contained.
The Australian dollar has continued to depreciate, raising concerns that in the medium term this will put upward pressure on inflation due to higher import prices. However, in the near term the stimulus from the lower dollar and the historically low cash rate has yet to be fully transmitted to the real economy.
The consensus of the nine shadow board members for keeping the cash rate unchanged at 2.75 percent has dropped from nearly 70% in July to 47% in August. Members are nearly 40% confident that a reduction of the cash rate by 25 basis points is the most appropriate policy.
The shift towards a rate cut clearly shows up at the 6-month horizon: the probability that rates will need to rise in the next six months has dropped from 30% to 25%, while the probability that rates ought to be lower than the current rate has increased to 50%. A year out, the shadow board members continue to attach about a 45 percent probability to the need for an increase in the cash rate and approximately a 40 percent probability to the need for a decrease in the cash rate.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
