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RBA leaves cash rate unchanged at 2.5% in August
Topic Started: 5 Aug 2014, 03:30 PM (1,571 Views)
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The RBA has passed the time for talk

Callam Pickering

The Reserve Bank of Australia wants to leave rates unchanged for some time but the only justification is a fear of a housing bubble. The RBA should follow in the footsteps of other central banks by introducing macroprudential policies, which will soften the housing market and allow it to ease rates, lower the dollar and support a stagnating recovery.

The cash rate remained at 2.5 per cent in August – the eleventh consecutive meeting without a rate move – but with each passing month there is mounting evidence that the Australian economy is not rebalancing as quickly or as successfully as the RBA believes.

Its faith is increasingly misplaced and its belief that the economy will simply return towards trend is little more than wishful thinking. The Australian economy faces a number of headwinds – most notably the collapse in mining investment – and it remains unclear what, if anything, will fill that void.

The RBA does not necessarily have to cut rates now but it should have an easing bias. And a rate cut remains necessary to follow up the recent – but increasingly shaky – momentum that the economy developed late last year.

Low interest rates continue to support the economy but most indicators have deteriorated somewhat during the June quarter and are poorly placed for the second half of the year.

Household spending has softened on the back of declining real wages and a federal budget which places a considerable burden on those least able to bear it. Earlier today I noted that net exports could subtract somewhere between 0.8 and 1.4 percentage points from real GDP growth in the June quarter (Australia is paying the price for its reliance on exports, August 5).

Lending continues to be strong but mostly for mortgages on existing property, which does not add to the productive capacity of the Australian economy. Small and medium-sized businesses continue to struggle and are receiving little help from our major banks.

Inflationary pressures appear to have peaked – at an annual rate of 3 per cent – and will begin to soften on the back of poor wage growth and a modest rise in the Australian dollar. The RBA said that ‘inflation is expected to be consistent with the 2-3 per cent target over the next two years.’

But the Australian dollar remains ‘high by historical standards’ and continues to weigh on the non-mining sector and export earnings. The RBA has thrown a few limp jabs at the dollar over the past year but none of them have stuck.

The high Australian dollar presents the most pressing justification for a lower cash rate. It is time that the RBA stopped talking – particularly since it is hurting its credibility – and started doing. A stubbornly high dollar is compromising all the hard work that the RBA has done to rebalance the Australian economy.

The main reason to not cut rates is the fear that housing will overheat, but that fear is misplaced.

The housing market can be managed by macroprudential policy, which will allow the RBA to use traditional monetary policy to support the broader economy.

Elevated house price growth isn’t an argument for tightening; it is instead an acknowledgment that monetary policy is too blunt an instrument to support an economy and also reign in asset prices.

House prices might soften without the introduction of macroprudential policies – I’ve made that argument before – but it provides flexibility and a useful insurance policy for a central bank. This is the path the Reserve Bank of New Zealand and Bank of England have undertaken.

The household sector needs greater relief but a rate cut will be far more effective if the extra money isn’t squeezed into higher mortgages. Our banking sector would respond to macroprudential policies by directing more credit towards the businesses sector, which would jump-start non-mining investment and strengthen the Australian economy.

If the RBA is serious about reducing the dollar – and despite its pitiful efforts I’m assuming it is – then it would be best served by calling the Australian Prudential Regulation Authority (APRA), introducing macroprudential policies and then cutting rates. The households and businesses of Australia would be most grateful.

Read more: http://www.businessspectator.com.au/article/2014/8/5/economy/rba-has-passed-time-talk
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The RBA has become a tool of the politicians. Uninformed policy is driving economic outcomes.

Policy and strategy should be focusing on the particular aspects of the economy which will drive employment including those that involve protecting our industries.

Given the recent past it appears the current administration is incapable of that and certainly there are no measureable outcomes outside of the fundamental ABS basics that invite debate in this area.

Our current leaders who are the liberal party need to fix that. Replace the deadweight administration and get advisors with inovative ideas for the country. Balance the risks and move forward.
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newjez
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6 Aug 2014, 12:06 AM
The RBA has become a tool of the politicians. Uninformed policy is driving economic outcomes.

Policy and strategy should be focusing on the particular aspects of the economy which will drive employment including those that involve protecting our industries.

Given the recent past it appears the current administration is incapable of that and certainly there are no measureable outcomes outside of the fundamental ABS basics that invite debate in this area.

Our current leaders who are the liberal party need to fix that. Replace the deadweight administration and get advisors with inovative ideas for the country. Balance the risks and move forward.
Are you suggesting the rba has wider powers?
Whenever you have an argument with someone, there comes a moment where you must ask yourself, whatever your political persuasion, 'am I the Nazi?'
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