FINALLY, an admission, of sorts… “The Reserve Bank Was Wrong In Keeping Interest Rates High”. For a year we have heard that rates had to stay high and that there was the likelihood they would go higher because of the threat inflation posed on our economy. Meanwhile individuals and those outside the resource sector (especially those in retail, tourism and manufacturing) had to effectively pay the Reserve Bank ‘inflation insurance policy’.
The Federal Government is responsible for fiscal policy (how revenue is raised and where it is spent) but it is the Reserve Bank that has control over monetary policy (the price of money). Glenn Stevens has shown himself to be very quick to ‘jump on the brakes’ and slow our economy if there is even a hint of inflation moving beyond the RBA’s target range (2% to 3% per annum). On the flip side, when things are obviously slowing and the economy needs a push along they are very slow to ‘push down on the accelerator’… or lower the official cash rate!
Make no mistake… this past Tuesday (Melbourne Cup day) what Glenn Stevens effectively announced was that he and the RBA Board misread the true state of the economy during the preceding months. They got it wrong AGAIN!
Cast your mind back a few years…
During the 2007 federal election campaign the RBA moved to put rates up. Kevin Rudd had been Prime Minister for just a few short months when they again raised rates in February 2008. The economy was slowing and business and consumer confidence was vapourising fast… so what did the RBA do? One month later, in March 2008, they moved and put rates up yet again. That last rate rise was wrong… I said it at the time as did Malcolm Turnbull – then Federal Opposition Leader. Economists were still divided and newspapers continued to peddle whatever negative sensational headlines increased circulation numbers; and thus advertising revenue.
These decisions taken by the RBA essentially resulted in a big wet blanket being thrown over our economy. In September of that same year we saw the collapse of the US ‘giant’ public company – Lehman Brothers – triggering the Global Financial Crisis (GFC) – the most uncertain economic period since the Great Depression 80 years earlier. I’m not suggesting the RBA caused the GFC but that their conservatism pushed them into going too far and unnecessarily slowed the economy to the point of weakness… so that when the GFC hit not only did they have to scramble and drop rates hard and fast, but the Rudd Government borrowed and spent to build school halls, put pink batts in ceilings and give away $900 cheques to most Australians – including those living abroad and many who were deceased.
For the record I don’t have a problem with a federal government using fiscal policy to protect an economy but had the RBA not been so heavy handed at the beginning of 2008 we would not have been in the unnecessarily weakened position that required so much spending. NB: Had those spending programs been better rolled out and managed the government could have achieved the same result for a fraction of the cost – but that’s another story for another time.
Regular readers of my newsletter know when it comes to monetary policy (the movement of interest rates) I am pretty vocal. Throughout this past year I have disagreed with the economic assessment of most Australian economists; I have absolutely been at odds with the conclusions of Glenn Stevens and the RBA Board. On September 28th I wrote…
My opinion… the Reserve Bank (RBA) should have dropped official “Interest Rates“ last month by as much as 50 basis point – or ½%.
This would have:
- Boosted consumer confidence
- Stimulated spending and given retail a shot in the arm
- Created more jobs as money is freed up to flow through the economy
- Caused the Australian dollar to fall (sooner and further); which in turn is good for tourism, manufacturing, agriculture, mining (and other export markets)
(you can read entire article of 28th September 2011 >>>here)
So while I believe this month’s rate cut was too little and too late, at least the RBA has now taken the first step! We can’t change what has been so the important question is “where to from here”?
Read more…
Written by
Nick Lockhart @ mrd on November 4, 2011
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