It’s the same every time we face this question. The same tired people. The same reactionary arguments. The same lack of imagination. All have resisted rate cuts for years, been wrong the entire time about it, yet they never let up nor learn. At the AFR:
“Compared to prior downturns, the recovery in consumer sentiment is the sharpest seen in the history of the series and underlies the particular nature of this shock,” NAB economists said.
Citi, Morgan Stanley and Deutsche Bank are among the economists who now think a rate cut is questionable.
…Morgan Stanley’s Chris Read said in a note to clients last week that COVID-19 restrictions would also play into RBA policy, making “further easing this year less likely”, particularly after a stimulatory federal budget.
.,.BetaShares chief economist David Bassanese has said the strong near-term fiscal stimulus provided in the federal budget could reduce the chances of the RBA cutting interest rates.
Other economists including Professor Warren Hogan and former RBA governor Ian Macfarlane have also warned against cutting next month.
Come on, guys. Shake off the index hugging and monetary reactionaries at the AFR. There is no top tier data that suggests anything other than a disastrous economy. Inflation is dead and buried. Payrolls are down 4% since March and have gone backward since June. The budget is a bizarre experiment in supply-side economics that drops the fiscal impulse at an alarming rate while leaving an enormous demand deficit.
Housing and commercial property markets in the major SE cities are confronted with calamitous oversupply. Likewise the entire mass immigration economy. Victoria is stuck in lockdown under a Xi Jinping mini-me. NSW is still constrained by the virus fight. Income growth is falling and about to be smashed by the budget. China is decoupling every Australian tradeable insight and its tourists plus students are gone for good.
In sum, the RBA is catastrophically behind the curve as a gigantic demand deficit singularity eats the heart of the economy. And you want to add a powerfully rising AUD to that to crunch financial conditions, embed deflation and hollow out the economy even more?
The RBA will definitely cut in November and expand QE because a demand deficit is the one thing that it can address.
When that fails, right along with the budget, it will be forced to cut negative after that.
The RBA may be paralytically conservative but it’s not stupid. Indeed, this morning Phil Lower made perfect sense:
The first is how much traction any further monetary easing might get in terms of better economic outcomes. When the pandemic was at its worst and there were severe restrictions on activity we judged that there was little to be gained from further monetary easing. The solutions to the problems the country faced lay elsewhere. As the economy opens up, though, it is reasonable to expect that further monetary easing would get more traction than was the case earlier.
A second issue is the possible effect of further monetary easing on financial stability and longer-term macroeconomic stability. This is an issue that we have paid close attention to in the past when we were considering reducing interest rates in a relatively robust economic environment. It remains an important issue today, but the considerations have changed somewhat. To the extent that an easing of monetary policy helps people get jobs it will help private sector balance sheets and lessen the number of problem loans. In so doing, it can reduce financial stability risks. This benefit needs to be weighed against any additional risks as people take more investment risk in the search for yield. We also need to take into account the effect of low interest rates on people who rely on interest income.
A third issue is what is happening internationally with monetary policy. Australia is a mid-sized open economy in an interconnected world, so what happens abroad has an impact here on both our exchange rate and our yield curve. In the past, the interest differentials provided a reasonable gauge to the relative stance of monetary policy across countries. Today, things are not so straightforward, with monetary policy also working through balance sheet expansion. As I noted earlier, our balance sheet has increased considerably since March, but larger increases have occurred in other countries. We are considering the implications of this as we work through our own options.
Lower mortgage rates and Australian dollar coming. Now, all we need is for to APRA to tighten to protect financial stability and Australia finally has rational monetary settings.
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