Well there we go again, the Reserve Bank cut another 25 bps to 3 per cent. That brings us to about 175 bps worth of cuts so far since the easing cycle started a year ago. No surprises there, I guess, unless you noticed that the economy is currently experiencing broad based economic strength – led mainly by the non-mining sector. Hmm, that must have slipped the board’s collective mind.
It really goes to show how farcical the monetary policy decision making process has become – and this is not in the national interest. Consider that in the November statement when rates were held steady, the board noted: "At today's meeting, with prices data slightly higher than expected and recent information on the world economy slightly more positive, the board judged that the stance of monetary policy was appropriate for the time being.” Some semblance of sensibility – a throw back to a bygone era.
The thing to note now is that there is no data we have seen over the last month that could possibly have changed that view. Yet so desperate have commentators become to see lower rates, that a 20 per cent surge in business investment next year (anticipated) is being used as proof that the mining boom is over and that rates must be slashed – slashed to a level (so far) not seen since the GFC.
The Reserve Bank even takes up this cause, suggesting in the press release that "looking ahead, recent data confirms that the peak in resource investment is approaching. As it does, there will be more scope for some other areas of demand to strengthen.” It's laughable because growth over these last few years has been driven primarily by the non-mining sectors. Consumption in particular, although housing remains weak, as does non-mining investment. Growth in truth is being driven by a broad number of industries outside housing and manufacturing (which together account for only about 10 to 15 per cent of the economy).
This shows just how easily the board is swayed by the weight of public opinion – or perceived public opinion. On an objective analysis it can’t be said that the peak in mining investment is even close. This is ludicrous and recent data dispels any notion of it, suggesting instead that investment will continue to surge next year. Evidence to the contrary is non-existent.
Consider that the last time we saw the cash rate at this level, the global financial system was in meltdown and economies around the globe were mired deep in recession. The US was losing about 500,000 or more jobs every single month. We are nowhere near this position today and yet the Reserve Bank has seen fit to cut rates to same level. It should be a cause of great national concern that monetary policy is being abused in this way. If we truly needed lower rates by all means cut – as in 2008 when I was a lone voice in the Australian market urging the RBA to do so when others were instead urging hikes to fend off the inflation genie.
Where will the bank stop? Nobody knows. Most economists look for one more rate cut to 2.75 per cent early next year, but the reality is there are no criteria. Inflation is at the mid-point, growth is above trend and the unemployment rate is low. The traditional criteria suggests the cash rate should be much higher. Moreover forecasts for weakness have thus far proved wrong for years and cannot be relied upon by any prudent or objective policy maker. So, where is the criteria for further rate cuts? That business investment is planned to grow 20 per cent next year instead of 33 per cent? If that’s the best the board can come up with there is a problem.
Have a read of the statement yourselves and tell me honestly – where is the smoking gun for a crisis like cash rate? Something is rotten.