The curious clamour for a rate cut

There are very few legitimate reasons for the Reserve Bank to lower interest rates. If they do cut, it will only make things worse.

If the Reserve Bank cuts interest rates today, as a majority of economists and market forecasters are forecasting, it would be purely symbolic, an almost entirely meaningless act. Its only impact would likely be negative, not positive.

The key problem with the Australian economy that is not external, and thus outside the RBA’s influence, is weak business investment. This is not due to interest rates that are too high or to a lack of equity funding -- it’s due to a lack of confidence, in turn probably due in equal parts to political chaos and tumbling commodity prices.

If anything, a rate cut today would make it worse. CEOs would look at it and think they were right to be worried, and cancel any spending plans they might have had.

There is certainly no need to cut rates to join in the currency wars and get the dollar down. Australia is already on the winning side of the currency wars: the exchange rate is already well in decline and will keep going down.

There is no danger of deflation in Australia. Core inflation is still above 2 per cent, something most other developed countries can only dream of. In fact, neither inflation nor deflation is any kind of issue at all in this country.

Employment growth has been picking up, as the government keeps desperately reminding us, consumer demand has been holding up, business conditions are on a broad uptrend and there are clear signs of a pick-up in non-mining business investment.

So what, exactly, is the problem that a rate cut would solve, apart from re-igniting the housing market and further impoverishing self-funded retirees? It’s hard to think of one, apart from business confidence and the possibility of another crisis in Europe.

And why wouldn’t business confidence be low? Australia has endured a decade of wildly chaotic and incompetent government, starting with the Howard government’s ill-fated industrial reforms in 2005, then years of policy mayhem on climate change and emissions trading and more recently utter incompetence on fiscal policy -- both in accurately forecasting the budget and dealing with the deficits.

Australia’s businesses are punch drunk and disillusioned. Yesterday’s speech by the Prime Minister might represent a turning point -- we can only hope -- but given the record of the past 18 months, you wouldn’t bet your balance sheet on it.

In any case, a rate cut today will make no difference, and only make things worse.

Is there reason to worry about Europe and take pre-emptive action with a rate cut?

No -- Greece will not be allowed to leave the eurozone and a deal will be negotiated. Despite all of its wielding of the austerity whip over the past few years, when push comes to shove Germany will do almost anything to ensure that Greece, Spain and Italy stay in, starting with Greece.

That’s because if they exit, the euro will soar, which would be a nightmare for Volkswagen, BMW and Mercedes.

It used to be said that what’s good for General Motors is good for America -- well triple that for Germany and its big three carmakers. Given their importance to the German economy, and of exporters generally, Angela Merkel will do almost anything to preserve the weak euro and maintain the profitability of German industry, and that requires a continuing partnership with Greece, Italy and Spain to drag it down.

The only legitimate external concern the RBA might have is with China, where debt is more than 200 per cent of GDP and still growing rapidly. It would be easy to conclude that China is heading for a financial and banking crisis.

Except that the government is effectively both the borrower and lender of most of the debt. It would therefore be very surprising indeed if a banking crisis engulfed China -- it would be more in the nature of a very unlikely act of deliberate suicide than an actual financial market bust.

It’s always possible that the RBA will be panicked into cutting rates today by the general global push and market consensus towards lower rates. In any case, the pricing for a cut by March is now 100 per cent.

But it is a curious clamour indeed.

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