Thursday, December 04, 2014

Why the Reserve Bank board is poised to cut



After a year of finely judged inactivity, the Reserve Bank is stirring.

The bank's board met for the last time this year on Tuesday and concluded as usual that "the most prudent course is likely to be a period of stability in interest rates".

But after the national accounts it's no longer so sure.

It isn't just that economic growth is weak; it's that it's been weak for two quarters in a row.

In the past six months Australia has stepped down from an annualised economic growth rate of 3.6 per cent to an annualised rate of 1.6 per cent.

Put politically, during the Coalition's first six months in office, economic growth was high; during the past six months it's been low.  There are few signs it will pick up without help.

The Treasurer will do what he can, or as much as he feels he is able to. He says he won't cut spending any further ahead of Christmas.
But it won't be enough.

That's why the Reserve Bank board is considering cutting its cash rate when it next meets on February 3 after a two-month break.

A cut isn't completely locked in and a lot can change in two months. But most of the arguments line up in favour of a cut.

One is that a cut would boost the economy without stoking damaging inflation. Wage and price rises are too low and unemployment too high for inflation to be a concern.

Another is that a cut would help bring down the dollar, which itself would boost the economy. It would help stem the inflow of hot money that's keeping the dollar high.

The only cause for concern is that it might restoke an unsustainable real estate boom. The bank has other measures in mind to deal with that including tougher lending standards for banks that lend to real estate investors.

There's little reason not to cut.


In The Age and Sydney Morning Herald




Related Posts

. July 2013: Inflation is too low. Stand by for a pre-election rate cut

. October 2013: Why there won't be any more rate cuts this year

. February 2014: Steady as she goes. Rates on hold all year