The Reserve Bank’s decision yesterday was an odd one considering that it comes after a surge in US jobs and the biggest increase in domestic retail sales in about six years. It certainly wasn’t a good one when you consider the negative impact rate cuts have had on confidence this cycle - confidence has actually deteriorated since the bank started easing rates.
The bizzare thing is, when you read through the Reserve Bank’s press release there really is no, or was no economic case made for the cut. The board looks for a pick-up in global growth next year noting that “the United States continues on a path of moderate expansion and China's growth is running at a more sustainable, but still robust, pace.” By the bank’s own admission, growth is around trend etc and inflation at the mid-point of the target on both a headline and core basis - with those results only pushed up “a little by the impact of the carbon price”. Finally on the labour market the bank notes that unemployment “remains relatively low”.
None of this would appear consistent with a record low cash rate, or further cuts. Indeed it isn’t – but here we are. Political pressure and the Australian dollar, that’s what it’s all about and this was made clear in the second-last paragraph. Credit was also thrown in as a reason, but the bank has previously noted that they only expect credit to grow with disposable income anyway - so not much of a pick-up. Really it’s the Australian dollar they are targeting.
The big problem is that with the Australian dollar as the target, we have no idea where the cycle trough might end up being - there are no sign posts, which by itself makes it bad policy. Certainly the board has indicated that rates could go lower, noting that it had only used ‘some’ of its scope to cut. That it will cut again I don’t doubt given that they do not have the economy in mind as they ease. When doesn’t matter - its arbitrary. The bigger question is where will it cut to. The problem we have in answering that is that rate cuts to date have failed to have a sustained dampening impact on the currency.
So what’s the end game - QE? My concern is that we are headed in that direction. Certainly the Reserve Bank appears to have adopted the same communication tactics as the Fed. At the very least, with other banks printing and the Australian dollar as the clear target for policy, we can’t rule that out.
That’s especially the case given the government’s incompetence has seen a rapid deterioration in the budget which, despite misleading comments from Swan, Gillard and other ministers isn’t because of an unexpectedly poor revenue position. Revenue growth has been and is tracking forecasts well so far. The problem is that spending is out of control and was never reined in following the GFC splurge. Forecasts that spending would decline this year have been revealed as the fiction, they always were, and at this point you need to recall the great fiscal consolidation that some economists were harping on about over the last two years - as I highlighted at the time it wasn’t happening and now here we are. Perversely it was this expected fiscal consolidation that was a key reason noted by some investment bank economists as a reason why the Reserve Bank should cut! Ultimately the government has failed, not because of declining revenues but because of old fashioned stupidity.
Anyway my point is this is only encouraging the government to take the same path as the US, UK and Japan. Not to the same extent yet, but we are certainly headed that way. Yesterday’s decision by the Reserve Bank board was yet another step in that direction and this is not good for the country.