Is Professor McKibbin living under a rock?

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Professor McKibbin is certainly holding the line, from the AFR:

Former Reserve Bank of Australia board member Warwick McKibbin has urged the central bank to ignore “market hysteria” over the weakest inflation figures since 1999, warning that adopting the zero-rate policies of Japan and Europe won’t fix the economy.

…Professor McKibbin said focusing only on keeping inflation within its target range would also lead to more house price distortions.

…”Suppose you do think you should cut? How successful has it been for all those other central banks that went to zero,” he told The Australian Financial Review.

“You’ve now got negative rates in Japan and Europe, banks whose balance sheets are contracting so that they go out and take even more risk. It really isn’t the right set of policies to get you out of this low nominal income growth world.”

…”There is a case for maybe doing more fiscal, tax and productivity reform,” he said. “With financial markets there seems to be this hysteria that rates need to keep going down. I don’t buy that in the Australian context.”

With respect, Professor, if you can’t bring yourself to utter the words “macroprudential” how can you be taken seriously in this debate? Of course there is a danger of further house price distortions but the lever for controlling them has already moved on to APRA. They’ve been far too slow to act, but have finally, with some rather startling results:

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Housing finance growth is falling fast. That’s why the RBA can contemplate rate cuts at all.

As well, let’s play out the McKibbin approach of not cutting rates any further no matter what happens to inflation. The Aussie dollar goes straight to 0.80 cents choking off the services exports recovery just as the car industry shutters, the residential construction boom rolls over and begins its long fall, terms of trade falls resume, the mining capex boom continues down and non-residential capex rolls over despite government investment.

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Yes, we’ll still have net exports booming for another 18 months but the domestic economy will very obviously stall from levels that are already woeful:

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Of course MB supports more fiscal, tax and productivity reform but they’ll add further deflationary pressure. Inflation will tumble much further along with wages.

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All of this is going to happen anyway as the post-boom adjustment proceeds but if you’re not going to use interest rates and the currency as a shock absorber on the way through then you’re going make life awfully hard for everyone unnecessarily, as well as risk all kinds of deflationary feedback loop disasters.

Professor, train your considerable sights upon APRA!

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.