The RBA must slash and burn 50bps to -25bps urgently


Via RBA sockpuppet, Terry McCrann:

But because it would be not just a rate cut now; in these ‘living-with-the-virus’ days, it’s become a ‘rate cut-plus’.


It would also be likely to move to push that lower yield further out along the bond curve, to say five years bonds.

McCrann is probably right about the pace of the glacier. If that’s all we get then the RBA will remain miles behind the curve.

The Depressionberg budget is a deflationary stinker. It is going to rip out demand stimulus and replace it with supply-side tax breaks that will be retarded owing to the output gap.


The RBA needs to get much more aggressive to fill the domestic demand black hole:

  • cut rates 50bps to -25%;
  • launch an “Operation Twist” that halves the ten-year yield;
  • loosen the rules on the TFF and buy enough bank debt to crater mortgage rates the whole 50bps, and
  • have a yarn with state treasurers about what infrastructure stimulus that they can get up in a hurry and buy whatever debt they need to do it.

Otherwise, the fiscal cliff is going to savage demand going into Christmas and then gut it completely in Q1, 2021 as the withdrawal of JobKeeper and JobSeeker destroys household confidence, stalls any property rebound and renders all tax cuts savings.


If the RBA eases aggressively now then it can crater the Australian dollar while the US election cycle lifts DXY. If it waits until next year then the RBA will be chasing a falling DXY trying to lower the AUD. To guarantee the stimulus flows mostly into the currency, APRA should also lift the lending buffer 50bps.

Contrary to nearly all MSM reporting, the Depressionberg budget is not a Keynesian recovery plan. It is an experimental trickle-down tax deformation that has little or no demand growth to service. What it has, it will automate into.

I would like to argue that the Morrison Government has seen the error of its ways, is no longer interested in stoking private debt creation and is instead focused on repairing Australian competitiveness and capital deepening to match its China decoupling plan. But for that to be true it would not be increasing the cost of energy via the gas unplan, nor blabbering about the removal of responsible lending laws.


So, that leaves only one conclusion to draw. The Morrison Government is overly ideological and has no idea how to craft an effective Keynesian stimulus program.

That leaves the RBA with no choice but to slash and burn to meet its mandate. Undoubtedly it will be too slow to realise it.

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.