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.