The rate cut cycle is not over

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A number of economists have leapt upon today’s CPI print to declare the end of the rate cutting cycle. This is false in my view.

Rate cuts have been off for the past several months as Sydney property prices have entered an unprecedented price blowoff. This is a much more significant issue than today’s CPI print, which was all over the place, with the oil price prominent in travel.

But the cycle is still not finished. The business investment downdraft next year is massive. The only way to mitigate it is to improve competitiveness and boost tradable investment via a lower dollar.

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With this in mind, the RBA will not act on Sydney property prices. More likely it will watch the bubble blow to even more unprecedented levels and then belatedly be forced to embrace macroprudential tools.

The timeline for this will be slow. Property will dip seasonally over December and January before resuming in February. By the end of the Autumn selling season it will perhaps have occurred to the RBA that it does not have a handle on Sydney property speculators and they’ll begin discussion of the new tools required. That’s not until at least May. This will be reinforced by the fact that New Zealand property prices will have plateaued owing to its deployment of said tools and its currency will also be weaker than ours as a result.

At that point it will take the RBA at least six months to jibber jabber about MP tools, and probably longer, in which time Sydney property will be most of the way to the moon.

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MP tools will be rolled out late next year and finally stall Sydney. At which point there will be next to nothing supporting the economy as business investment continues to plunge for another two years. Rate cuts will then resume lest the previous 18 months of stupidity unwind.

About the author
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.