Monetary reactionaries demand no rate cut

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.

David Llewellyn-Smith

Comments

    • Less Woke More BlokeMEMBER

      So it seems that our dreams will never come to be
      How can such a stupid thing destroy humanity?
      A few weeks till extinction and there’s nothing we can do
      A message sent to other worlds will say “It was just the flu”

      I thought all the let er rippers are claiming it only affects oldies/comorbids and literally everyone else is ok?

      I confuse!

  1. Jumping jack flash

    An interest rate cut isn’t the only way to skin the cat of lowering debt eligibility criteria and countering that constant drain of 100 billion interest dollars on the economy, that are obviously not effectively replaced through our lacklustre debt growth. [for the past 10 years!]

    They could instead, for example, implement a UBI proper using QE money, or simply borrow the money directly, in the name of COVID of course!

    Just don’t call it xSeeker or yKeeper.

    DebtGrower perhaps?

    • I wrote something long these lines in another thread earlier in the week but it seemed to have disappeared. A temporary UBI that tapers off as the DEMAND driven economy recovers. It’s trickle up economics. A few grand infrastructure projects would be good to throw in too. Once the economy is back on its feet then we can work on taxing it back, mostly from the big end of town with the aim being to create a larger segment of middle class. The last thing we want is lower rates and more precarious borrowing. A period of jobs recovery and stable house prices while we wait for a bit of inflation. Dropping interest rates further from here is crazy talk and only digs our hole ever deeper. Isn’t madness colloquially described as doing the same thing repeatedly and expecting different results?

  2. Lower interests rates coupled with tighter lending criteria never happens. It’s always just lower teh rates.
    Same problem, same ‘solution’, same outcome.

  3. Jim's Central Banking

    Making the same mistakes as other economies is hardly creative or visionary.

    And there is basically no chance APRA is going to step in with MP.

  4. David L-S,
    I am writing this late at night so none of your readers will get the chance to read it.
    You are a complete fool to say that constantly lowering interest rates is the intelligent thing to do.
    If people actually act on your advice, they could be ruined.
    If you have any humility left in your body, do yourself a favour and read Lacy Hunt’s ‘Hoisington Quarterly Review:Second Quarter 2020’ and
    ‘Hoisington Quarterly Review:Third Quarter 2020’

    If you think you know more than Lacy Hunt Ph.D, you should give the game up and clock in at the RBA.
    Sincerely,
    Stephen Nordstrom

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