There’s a growing chorus of opinion – noting editorial in The Australian and financial press elsewhere – that the Reserve Bank should be done with cutting rates and start to show some restraint. I’ve long thought this easing cycle to be reckless and unnecessary, even counterproductive, and so I obviously view this rising tide as a positive for the national interest.
It’s not without cause that commentators, economists and citizens alike view the reckless actions of central banks, not only in Australia but especially abroad, with growing concern. Only recently S&P downgraded Canada’s largest banks following the development of that country’s very own housing bubble. That it occurred so soon after the GFC would, to a reasonable person, appear utterly absurd. But it serves to highlight one simple fact. Very loose monetary policy carries with it a high degree of risk. Consequently it is a stance that should not be adopted lightly – recent history has shown this repeatedly.
Now Alan Kohler noted yesterday that, at the very least, rapidly improving investor sentiment is reason enough for the Reserve Bank to stay its hand (The 'Great Rotation' will stay the RBA's hand, February 4). Agreed. The board should instead digest recent developments and see how things progress. Wise words and I think they will leave rates on hold.
Looking forward it's less clear. Most analysts expect rates to be cut at least once more and at least three large banks suggest the Reserve should cut again because the easing cycle to date has done little. That is, record low interest rates have had no impact. The obvious rebuttal is: what would still lower rates achieve that record low rates haven’t? And this is a question that needs a serious response. It isn’t the primary consideration though – overwhelming this by a significant magnitude is an additional imperative for the board to consider. That is, its poor track record in establishing the economic backdrop.
When this easing cycle started in November of 2011 it was, on the face it, on quite reasonable grounds. It is true that inflation ended up not being the initial threat data had indicated. Fair enough. Unfortunately the same can’t be said about subsequent actions. Consider in turn the moves the bank has made:
– The Reserve Bank took the view that it should be pre-emptive in dealing with European anxieties, just in case something went wrong. This overlayed the initial rate response from November 2011 all the way through to June 2012. We now know that a ‘Grexit’ is actually a low probability event, and the talk now is of a ‘Crexit’ (crisis exit). The crisis may not be over but the risk of broader financial market contagion is substantially reduced. In fact, it's largely over. The point is this ended up not being a reason at all – and yet rates are still at record lows.
– In addition to Europe, weak domestic consumer spending was consistently cited as a cause for rate cuts and even when this was shown to be wrong, the board only begrudgingly accepted this fact – and went on to suggest strength was temporary. Again, this has subsequently been shown as false – insert ongoing record car sales and solid sales from Wesfarmers, Woolworths, Kathmandu and others.
– Then we know that at various times weak data from China and US was cited and in conjunction with ongoing European concerns, the board was concerned that "there was a reasonable likelihood that the tendency toward precautionary behaviour both abroad and at home would intensify.”
– Fast forward to October and concerns over Europe and global growth prospects more broadly, had already come to nothing – it only took several months. So the board decided that the collapse in iron ore prices meant that the mining boom had ended and that this was now a justification to cut rates. This was shown to be wrong the next moth when capital spending expectations data showed firms expected to lift investment a further 20 per cent over the next year to a new record. Iron ore prices subsequently rebounded.
– Overlaying all of this was the supposedly contractionary influence of the strong Australian dollar and a substantial fiscal contraction – and yet growth was still at trend and the unemployment rate historically low. Consumer spending above trend – and there was no fiscal contraction. Swan has even given up on the surplus idea.
– At the December meeting, there didn't really seem to be a reason for a cut. The board knew that every other catalyst for a cut had come to nothing – US economic data was accelerating as was China’s, iron ore was rebounding, consumer spending was growing at rapid clip, Europe’s problems had be resolved et cetera, et cetera. And the board still cut.
This track record goes beyond embarrassment and I‘m not highlighting it all to gloat. It is actually a cause for grave national concern. It demonstrates that board of Australia’s pre-eminent economic policy making body, simply does not have what it takes. It does not understand the economic landscape. To be blunt, the standard should be markedly higher – they are not elected and there is little to no accountability for their actions.
Australian citizens deserve better and we should not be misled – it is deceit to suggest a lower cash rate in each and every situation serves the national interest, or is in some way for the betterment of the citizenry. This is a lie. Look at how such a stance served citizens of the US, the UK, Spain and Ireland. In each case, banks got the benefit while households got the bill. So don’t be misled by industry groups with something to gain – their gain, in this situation, is more often than not at the national expense – your expense.
Inflation is low now for sure and there is little chance now of some distortion washing through the economy due to low rates. But that is the standing risk down the track. In any case, the same arguments were used when the Fed first cut rates to ultra-low levels early last decade: what harm will it do? Look at how that ended! Every recession in the modern economic era has had the hand print of inflation behind it, but these forces develop slowly and over time.
So we need to be mindful of that and policy makers need to be made more aware of the risk-reward trade-off. To what benefit does the Reserve Bank board take these risks? Is the dollar lower? Are manufacturers all of a sudden better off; is the housing sector rebounding? No. Then it is inexcusable to expose Australian citizens – families – to these well-known risks.