Monday, August 15, 2011

Koukoulas - Why the RBA should cut, now

Stephen Koukoulas was until a month ago Gillard's macroeconomic advisor.

He went public over the weekend in The Drum.

He says we can't rely on fiscal policy. It'll be up to the Bank.

"In looking for the RBA to start an interest rate cutting cycle, it is hugely encouraging to see the Prime Minister Ms Gillard and Treasurer Mr Swan sticking to their guns on the objective of a budget surplus for 2012-13. A moderate cooling in economic growth will not and should not prompt fiscal stimulus measures.

Rather, the management of the business cycle should be left to the RBA. In other words, the tighter the handle on the budget, the more interest rates can and will be cut.

Another critical thing about interest rate changes from the RBA is that they don't cost any money! Unlike fiscal stimulus measures, which are costly and often difficult to wind back, the RBA can cut - and hike - interest rates by any amount and at any time without costing the budget a cent.

Of course, the automatic stabilisers in the budget should be allowed to work and they will dampen government revenue and the 2012-13 budget surplus may yet slip into a tiny deficit. Who knows. It is way too early to be sure of the parameters that will determine the budget balance next year."

HT: Christopher Joye

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