The Reserve Bank’s decision yesterday to don the camouflage suit and tin hat and race out into the currency war battlefield, guns blazing, leaves us with a quandary.
Taken at face value, the RBA has made a total reassessment of its view of the economy and concluded that things are not going well – worse, apparently, than the statistics are telling us.
“This is good news for families and small business,” declared a confused Treasurer Joe Hockey. “It’s good news for the economy and it’s good news for jobs.”
Er, no it’s not. Families and small businesses already had the lowest interest rates they had ever seen or heard about from their grandparents, and were not looking for cheaper money. And saying it is good news for the economy and jobs is like saying the arrival of someone with a bucket of water at a bushfire is good news.
Presumably the ways in which the decision is not good news for the economy and jobs will be spelled out in more detail in this Friday’s statement on monetary policy, but to quote yesterday’s statement: “output growth will probably remain a little below trend for somewhat longer, and the rate of unemployment peak a little higher, than earlier expected.”
Translation: things have got worse.
But really, the idea yesterday’s rate cut is about the current state of the Australian economy is surely a furphy.
Disinflation is not a problem in this country and as the RBA itself acknowledged yesterday, credit growth is picking up and house prices are “rising strongly”. Against that sit the slightest possible concerns that are not supported by recent data: that output might remain “a little below trend” and unemployment “might” peak a little higher.
So why cut interest rates when the rate of interest is already low enough to prompt a solid acceleration of credit growth?
It can only be to throw the currency under a bus. So far this year 12 central banks have apparently cut interest rates, and we’re little more than a month into it. More important perhaps is that sentiment in the US has now turned against a rate hike there this year.
As the Fed argues about how long to leave rates at zero, currency skirmishes everywhere else in the world have turned into open currency warfare.
“Free trade” remains the superficial topic of conversation between politicians and bureaucrats every time they get together, but behind the curtain they are all frantically trying to cut prices through currency devaluation.
A global discounting war is underway, prompted by an excess of supply (of almost everything) and a shortage of demand. Doing it via the currency allows you to say that it’s the market at work, not protectionism, so not our fault.
The fight against the deflation -- the ostensible reason for most monetary stimulus today -- is just a fig leaf for competitive devaluation through monetary policy. Inflation is no longer a monetary phenomenon, if it ever was, and is resisting all attempts to conjure it back from the dead by printing money and cutting interest rates to zero.
Similarly, with interest rates already super low in Australia, it is very unlikely that business confidence and consumer spending will be susceptible to even lower rates still.
So yesterday’s rate cut in Australia, along with those of Canada, Switzerland, India, Denmark, and others, was all about currency. “A lower exchange rate is likely to be needed to achieve balanced growth in the economy,” yesterday’s RBA statement said.
In some ways, a central bank attacking its own currency is bizarre and perverse -- the watchdog turning on its owner.
But in the circumstances, there’s not much more that can be done. The RBA obviously feels that it can’t allow even the possibility of an Aussie dollar rally, even if it reignites the housing market.