Rate cuts imminent as Pascometer redlines against

Weeoo, weeoo, weeoo. The Pascometer is redlining on imminent rate cuts:

The “Reserve Bank must cut interest rates” chorus is growing louder. Too bad it’s barking up the wrong policy tree. Or maybe that should be, singing the wrong tune.

There are four powerful arguments for economic stimulus, the latest being yet another quarter of below-par inflation figures with no sign of any improvement on the horizon.

Throw in the horse before that cart – real take-home wages continuing to go backwards – and the sharp downturn in the NAB business conditions survey plus the negative “wealth effect” of falling housing prices, and you have good reason to think the RBA board meeting next week should indeed consider a rate cut.

But monetary policy – increasing or decreasing the cost of money – isn’t the only form of stimulus. More importantly, the power of lower rates decreases the lower rates are. And very cheap money can have the undesirable side effects, like housing bubbles.

I haven’t met or heard of a single business person in the last couple of years who has said: “You know, I’d like to hire another employee or perhaps invest in a new piece of equipment, but I’m just waiting for the RBA to trim the cash rate another 25 points.”

Monetary policy, as the RBA keeps reminding us, is already at a stimulatory level. Yes, ever-more-accommodative monetary policy provides stimulus, but it also gets to be like pushing on a piece of string.

The problem for the interest rate chorus is that we have come to rely too much on the RBA guiding the economy.

Former ANZ chief economist and current UTS professor, Warren Hogan, summed up the immediate problem in a tweet: “Not sure what a rate cut will do for an economy where credit demand is weak for reasons other than the level of rates. The policy focus for Australia, if the economy weakens, should be fiscal policy. Targeted fiscal stimulus could be more effective than rate cuts.”

So, there you have it. With Australia’s most reliably wrong economic indicator weighing against, rate cuts are now imminent. Why:

  • lending standards are tight, easing the price of money will aid credit at the margin;
  • lower borrowing costs will boost consumption;
  • lower rates will help slow the crash in house prices via a psychological boost;
  • lower rates will sink the Australian dollar boosting tradable sectors;
  • we need both monetary and fiscal policy right now as the economy is in an outright stall entering a federal election that will inhibit any direct fiscal response.

Finally, and most pertinently for this post, if this clattering and coughing, clapped out mechanism says it’s a bad idea then it is most assuredly a great one.

Comments

  1. First time ever I’m going to say I agree completely with Pasco. Rate cut will do nothing to help long term.

    • Rate cut that (mostly) isn’t passed on by the banks is like a double win for anyone short AUD and short housing.

    • A rate cut will improve the quality of the banks’ asset book. The lower rates go, the lower the number of stressed/default borrowings there will be, the less pressure there will be on the prices of the collateral underpinning their books.
      (NB: Like you, I think it’s an exercise in futility, but what’s left?)

    • Count me in.

      More rate cuts is stupid. Just like the previous 4 rate cuts was stupid.

      I’m personally positioned to profit if rates are cut, but that doesn’t change the fact that it’s stipid. On the other hand, the fact that it’s stupid raises the likelihood that it will be done. Straya!

    • Yeah I’m not a fan of lower teh rates. I side with Pascoe on this 1, which means RBA is gonna cut lol..

    • Yep. Pushing on a string. For the real economy any how.
      And im sure when i first started reading MB a couple of years ago they ridiculed the benefits of cutting teh rates too.

      • Oh no, you remember wrong.

        As I remember it, years ago MB thought (lamented?) that cutting rates “wouldn’t work” because it was “pushing on a string” and the consumer was exhausted, and house prices were at around all time highs, and private debt was at all time highs, etc, etc.

        Of course, It did work, and prices for houses proceeded to about double, consumer debt reached new all time highs, etc, etc.

        Now, is this time different? I think that only to a degree – there is less rate cuts to be delivered and the number mug punter is feeling a *little* chastened.

        Yet witness totalhousehold debt STILL growing. So cheaper debt should still be expected to draw in the suckers. Will there be enough suckers to turn it around enough to kick the can another 2-4 years? I wouldnt rule it out.

      • Peachy is correct. Those of us who argued against rate cuts, and predicted house prices to the moon, were heavily ridiculed.

      • Flawse and Peachy, you both have selective memories. HnH did argue for rates cuts, but also for MP, and you weren’t HEAVILY ridiculed. He disagreed strongly with your views, but to say you were ridiculed is bs.

      • Denno – I remember posting extensively recommending RBA promise to HIKE rates unless/until functioning MP was instituted. Then it could proceed to drop rates, if it wished.

        Everyone instead cheered the moron RBA on as the cut rates without any MP…. MP was only added after the horse was in a different-fecking-timezone.

    • Totally. A big mistake that the Federal government didn’t respond to the crisis in WA and Queensland using fiscal transfers. Instead RBAs did the heavy lifting with rate cuts pumping up a property bubble in states that were booming.

      Now broad fiscal stimulus is needed. Preferably with some kind of strategic purpose that will shape the future Australian economy not just prop up the wilting property sector.

      Strange that Pascoe is arguing against rate cuts though, I thought he was a property booster?

      • “Now broad fiscal stimulus is needed. Preferably with some kind of strategic purpose that will shape the future Australian economy not just prop up the wilting property sector.”
        Correct! However….
        The problem with that is that a fiscal stimulus with a strategic purpose to shape the future will crash the economy. The cracks are appearing, inevitably, in the FIRE sector and the cities within which it rages. A fiscal stimulus aimed at correcting that distortion would have to be directed away from those economic and demographic centres.
        Checkmate!

      • Jumping jack flash

        I agree, this is what we need, but nationalised production of useful stuff, perhaps cars… you know, like the Volkswagen.
        The problem is getting the lazy politicians to actually do some work and come up with an idea, and then execute it. Maybe become responsible for managing their portfolios? What a concept!

        Nationalise the entire supply chain from mining to smelting to tooling. We would and could be a productive powerhouse at very little cost.

        Unfortunately its a bit of a quandary: The pollies are so lazy and indolent they won’t come up with any good ideas, even if they could have any, because it might mean they’d need to do some work.

    • Hehe!
      Ban Cash – which is obviously being planned on whatever specious reasoning.
      Rate cuts all the way to nominal negative.
      Who said we can’t make this economy career into an even bigger BOOM!!!

      The moron side is far from finished yet!

  2. reusachtigeMEMBER

    If you aint subscribed to always Lower teh interest rates, that will fix thing, then you aint know Economics proper!

  3. – If the RBA cuts – what ammo does it have left when things get bad offshore? Cutting rates has been the best ‘last stand defence’ when things go bad offshore – and the probabilities are rising. There will be no monetary policy ammo left.

      • And when this mob actually does that (if they are still in power), that’s when we really get screwed

      • Jumping jack flash

        Ha! Do work? Fat chance. They’d just sell more of the responsibility to private companies, probably Chinese state controlled ones.

        Those guys can build islands. I’d like to see our government do that.

  4. A rate cut will do two nasty things to the economy:

    – collapse the dollar and create nasty inflation. When this last happened, we still made things. Industry was upwards of 17% of the economy. We produced a huge amount of our own fuel. We produced all of our own food. That Australia is dead, and its not coming back via a few paltry rate cuts. Its going to take a better part of a decade of hard work to build that kind of economy back. Great, but I’m not seeing much in the way of moves to bring this about from our leaders.

    – destroy international sentiment for investing in Australia. Lets face it, this economy is crap. One of the main things going for it was the differential between us and the USD. That is gone, and getting worse. Housing is not coming back, and our main exports are looking like they are hitting the skids. Capital will flee, and we don’t produce enough of our own to make up for this.

    What I am flabbergasted about is how this very site has become so immersed in the housing obsession that it can’t see anything beyond it. Maybe housing collapsing is the best of a bad bunch? Unless the government rides to the rescue with massive stimulus , not unlikely, maybe we really are about to have a recession that we had to have….again.

    • In Australia, there basically isn’t anything other than housing/property…

      The MB obsession with housing is because as housing (credit) goes, so goes Australia….they are right, and have been arguing for non-housing (and general non-Ponzi-like ventures) for years now, but the country just keep on with the housing Ponzi, and makes new ones, like immigration…

      We really do have a crap economy.

      • “have been arguing for non-housing (and general non-Ponzi-like ventures) for years now”
        Have to disagree Burb.
        MB has never, despite being invited by a few writers here, engaged in any debate/discussion on real policy that would really change the economy. It has consistently argued for rate cuts that would boost the consumption economy. Rate cuts and the resultant over-consumption do not produce an economy based on prudence and productivity.
        HnH, about once a year, writes an article outlining the dangers in the external account. Yet the rest of the time all we hear is more rate cuts to boost the consumptive economy.

    • Thanks Natahan – well said! Except
      “Its going to take a better part of a decade of hard work to build that kind of economy back.”
      The sort of loss of industry we have DELIBERATELY undertaken cannot easily be replaced – certainly not in a decade. Industries gather together in symbiotic relationships. You might lose them one by one or over a short period of time. However they cannot come back one by one.
      Secondly, where will we get the savings to re-establish industry on a grand scale? just follow the old formula and get the foreigners to do it for us, own it all, and this control an even larger part of our economy and nation?
      Thirdly, this has actually been going on, as a process, for 60 years. The last decade has just been characteristically climactic. As a result, not only have we divested ourselves of industry and skills, we have divested ourselves of the education system that was aimed at generating productive people. The whole education system was turned around to operate in eh FIRE sector or to be its fuel. Of course it has now further devolved into something almost unrecognisable as education in any way.

      We have to train teachers to train more teachers to train more teachers who will, eventually, be able to teach in a productive education system – we are talking generations – not a decade.
      Our whole Public Service and Banking system would have to be totally smashed and rebuilt. The Legal system would need restructuring.
      etc etc etc

      THEN – the population would have to VOTE for it – decade after hard decade! 58% of the voting population live in Sydney, Melbourne and Brisbane and their satellite cities. These are the areas that would be hit hardest over a long period. How is that going to work?
      We have to SAVE so that our economy is not just a vehicle for foreign powers to gain resources and control. The consequences of the notion of saving will be catastrophic to the current economic structure.
      So for a productive economy, we have to change everything
      Then we have to build!\
      Then we have to produce.

  5. A rate cut will do two nasty things to the economy:

    – collapse the dollar and create nasty inflation. When this last happened, we still made things. Industry was upwards of 17% of the economy. We produced a huge amount of our own fuel. We produced all of our own food. That Australia is dead, and its not coming back via a few paltry rate cuts. Its going to take a better part of a decade of hard work to build that kind of economy back. Great, but I’m not seeing much in the way of moves to bring this about from our leaders.

    – destroy international sentiment for investing in Australia. Lets face it, this economy is crap. One of the main things going for it was the differential between us and the USD. That is gone, and getting worse. Housing is not coming back, and our main exports are looking like they are hitting the skids. Capital will flee, and we don’t produce enough of our own to make up for this.

    What I am flabbergasted about is how this very site has become so immersed in the housing obsession that it can’t see anything beyond it. Maybe housing collapsing is the best of a bad bunch? Unless the government rides to the rescue with massive stimulus , not unlikely, maybe we really are about to have a recession that we had to have….again

    • @Nathan. I haven’t been a member of MB for as long as many people. However, I don’t recall reading editorial content arguing that RBA should lower interest rates, nor that RBA lowering interest rates will be a good thing. Merely that RBA lowering interest rates next is the likely thing (for a whole host of reasons). As far as the housing market itself is concerned, I see the MB editorial view to be roughly the same as what you espouse, i.e. the crash is coming and it’s the one we have to have.
      So, in furious agreement, it seems…

      • Not sure how long you have been around but around the 2012-13 timeframe they were advocating a slow melt for house prices and my hazy memory says lower interest rates as well.
        Feel free to go explore if you so desire. https://www.macrobusiness.com.au/2012/02/
        changing year and month will take you to any place in history, or at least as far back as the start of MB anyway

    • @Nathan. Re-reading your comment, I don’t think you are aruing for “the recession we have to have”. So apologies for putting words in your mouth there.

    • Most Australian punters think a rate cut is good because it makes your mortgage cheaper. It would be popular.

  6. TailorTrashMEMBER

    “lower rates will help slow the crash in house prices via a psychological boost;”

    Fcuk! that is just what we need ….bring on the Saturday morning debt auctions ….free money ….we will all be rich again from our houses .

    Let’s crash the house prices I say ….they are the rot at the center of much of what’s wrong with this country …..

  7. Lol…H&H you have to do a best of the Contrarian Indicator Pascometer report. I bet in the last 5 years there have been some whoopers we could chart?

  8. The government needs a booming housing sector to keep the economy out of recession. There’s not much else happening. We will have rate cuts and continual high migration to drive demand. Nothing is ever going to change