Kouk slams Lunatic RBA

Advertisement

Via the Kouk:

The Reserve Bank finally did it.

Cut interest rates that is.

In an effort to redeem itself from what is clearly its worst policy mistake since the lead into the early 1990s recession, the RBA has belatedly delivered the 13th interest rate cut in this very long monetary policy easing cycle.

It has finally realised that the economy is weak, inflation is too low, the unemployment rate is too high and that lower interest rates are essential to help repair these elements of an under-performing economy.

It is embarrassing for the RBA which just six months ago was talking of the need for interest rate increases because it saw the economy sustaining economic growth above 3 per cent.

It was also forecasting the unemployment rate to fall to 4.75 per cent and for inflation and wages to accelerate.

The RBA was also of the view that the destruction of wealth for consumers, as house prices slumped, would be largely immaterial to this economic outlook.

In what is a significant monetary policy error, it got all of this wrong which is why it waited until now to act to kick start growth.

In waiting to stimulate the economy with lower interest rates, in a poor reflection of its performance the RBA has allowed the number of people unemployed to increase by around 37,000 people since the end of 2018. Further to this, the number of people underemployed has risen by an additional 40,000 to over 1.15 million people over the same timeframe.

It is likely the level of job destruction will increase before the easier stance of monetary policy starts to impact to reverse this ugly situation.

What’s more, rather than lifting to above 3 per cent, annual GDP has slowed to 1.8 per cent, to be about the same as the low point for growth during the global financial crisis. The risk is that growth will stay weak in the near term as consumer spending remains depressed and the housing sector continues to slide.

At the same time, annual wages growth is mired around 2.3 per cent and inflation is falling, not rising as the RBA was recently forecasting. Firms are having discount their products in an effort to clear their excess inventories which is pushing inflation to record lows.

It’s a sad state for the Australian economy which enters its 28th year without recession in a tattered, fragile and poorly managed state.

The RBA is poised to cut interest rates again, sometime in the next couple of months. This should help to give the economy a much needed pick-me-up.

It is hoping the global economy continues to provide support to Australia via the current boom in commodity prices, in particular for iron ore. Of some concern is evidence of a recent dip in commodity prices which, if continued, would undermine the economy over the medium term.

If, as this is a genuine risk, the US-China trade war escalates dragging global growth lower into 2020, it is possible that the RBA will have to consider either negative interest rates or some form of quantitative easing – printing money in colloquial terms – to restore growth.

Such is the RBA policy error that any negative influences from the global economy will impact on an already fragile domestic climate.

Every monthly RBA Board meeting from now is live to the possibility of yet more interest rate cuts.

If unemployment keeps rising while wages growth and inflation are stuck near current lows, more interest rate cuts will come. It remains to be seen whether this will be enough to see the economy to return to full health.

If only the RBA had cut rates a year or 18 months ago when it was obvious it was missing its inflation target, the economy would be stronger today and in a better position to deal with the negative risks from the global economy.

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.