The Reserve Bank cut interest rates by 25 basis points in the jargon on Tuesday to a new low cash rate of 2.25%. This is the first cut since August 2013, just before the last election. Back then Joe Hockey lambasted the Rudd government for the sluggish economy requiring such stimulus. Now he hailed the RBA decision as good news for families, businesses and jobs.
ABC business editor Ian Verrender comments:
Make no mistake, this is an emergency cut to a level well below what already was considered crisis level.
Verrender explains that the RBA has two main roles. The first and primary role is to maintain steady prices, that is, to keep inflation under control.
Secondly, it has a responsibility to maintain the labour market as close as possible to full employment.
Verrender suggests that the RBA has now adopted a third role – massaging the level of the currency. This indeed seems to be supported by the Reserve Bank governor Glen Stevens’ continual commentary on the currency.
What really has spooked Mr Stevens are the actions of his global central bank contemporaries, many of whom have either embarked on programs specifically designed to depress their currencies or to cut interest rates.
Despite the Australian dollar falling sharply in the past year, from around US94 cents last September to US77 cents early this week, Mr Stevens argued the currency was still overvalued, given the crash in commodity prices and the decline in our terms of trade.
Last year Stevens called for a currency level of US75 cents. His comments indicate that he has an eye to the Trade Weighted Index, which measures our currency against a parcel of our trade partners. The TWI has not fallen as much, essentially because of the successful massaging done by other central bankers.
The Guardian quotes Stevens thus:
The Australian dollar remained above “most estimates of its fundamental value”, Stevens said, and reducing rates would therefore bring more downward pressure on the currency “to foster sustainable growth”.
Problem is that interest rates in other countries are down to almost nothing or less, so we will still attract money looking for yield, putting upward pressure on the currency.
On the box tonight one economist was suggesting that the RBA should trim a whole 100 basis points off the cash rate over the next year and take the currency down to US70 cents or thereabouts.
BT chief economist, Chris Caton, says the RBA is rightly concerned about employment and the investment needed to transition the economy out of its dependence on the mining construction industry. He sees Hockey as overly concerned about debt and deficits, which is not a big issue. Certainly it would be nice to reduce the deficit, but not at the expense of killing the economy.
Caton sees one more cut of a similar order down the road.
Chris Bowen (see at the bottom of the Hockey link) reminded Hockey of his 2013 comments.
“Joe Hockey and Tony Abbott both used to say that falling interest rates were a sign of a weak economy and a bad government,” he said.
“Instead of engaging in hypocrisy and spin, the Government just needs to start producing a proper economic plan with economic growth and jobs at its core.
“Making it harder for low and middle-income families to make ends meet while gutting science, research and development funding is no economic plan, it does nothing other than undermine future sources of economic growth.”
Peter Martin at The Age pointed out before the RBA move that our 10-year bond rate was now about 2.5%, basically the same as inflation. Effectively the government could borrow money for nothing.
Martin suggests that the government should borrow $100 billion or so to use in nation-building projects.
That’s enough to build the long-awaited Brisbane to Sydney to Melbourne high-speed rail line, or to build Labor’s original national broadband network, or Sydney’s $11 billion WestConnex road project plus Melbourne’s $11 billion metro rail project plus Melbourne’s $16 billion East West Link plus something big in each of the other states.
Or we could buy all the coal-fired power stations, shut them down and install solar with battery storage everywhere.
It’s a once in a lifetime opportunity. All we need is vision and confidence.
But that would mean ‘picking winners’, and increasing our debt numbers, so we’ll do exactly nothing.
Reducing interest rates when people are spooked about job security and their personal debt exposure is not going to stimulate the economy. Spooked people are not going to take advantage of low interest rates to increase their debt.
The real beneficiaries are:
1. Investors who are willing to borrow more to buy rental properties, shares etc. as 2. Those who have things to sell to these investors.
3. Industries that become more competitive when the Aus currency loses value.
If we want to stimulate the economy we need to:
1. Get more money into the hands of real consumers, not savers, investors or the sort of person overseas travellers. What Swan did for the GFC crisis was smart. By making one off payments to the not so well off Swan stimulated consumption without creating the long term cash outflows that would have resulted if he had did things like raise the pension.
2. Increasing the share of GDP going to the lower paid section of our society. (Instead of the LNP policies aimed at making the entitled rich even better off.)
3. Invest in infrastructure by either taking advantage of the low interest rates or, perhaps even smarter paying for some of it with a limited amount of quantitative easing.
4. Raise taxes and cut tax concessions to the rich and use the money to employ more people in the government services sector and/or infrastructure.
The Reserve bank should admit that the logical things required to stimulate the economy are outside of the RBA’s power and require government action.
John
You’d really love what they’ve done with the place in Venezuela.
The interest rate is near %20, inflation %54 p/a and investors are leaving on droves.
Unemployment is similar to Australia but ya can’t even buy dunny paper.
KN: Good policy when inflation is 54% is not the same as good policy when your economy is stalled, inflation is less than 3% and real unemployment as high as it is in Australia.
Part of what is wrong with Aus at the moment is that ideological governments hang on to solutions that no longer apply (If they ever did.)
A key problem at the moment is that the tools the RBA is allowed to use aren’t the right ones for current circumstances. The same thing happened during the stagflation problem in the Frazer years. It needed a Bob Hawke and his accord to dig us out of that one.
It needs a government that understands that screwing people at the bottom of the pile and depending on the lowering of interest rates is not the answer this time around.
BTW: I looked up the Kolobok artifact. out of curiosity.
What does this choice tell us about someone who uses this name?
John, it’s not for me to ponder why your ” search engine ” threw that up as your preferred search result.
Kolobok, the moniker, for me, pays homage to the Ginger Bread Man.
That little piece of malleable dough, destined to be gobbled up, but said no.
I recognise the foxes for what they are.
Ironically yet unsurprisingly it’s a Ukrainian tale.
Also unsurprising is that hyper inflation, that affects the poor most, is due to central planning wrong headedness.
True, those rusted on Keynes fans think every ailment needs the same medicine.
Swan treated dysentery with Chemo and radium.
Interest rates are at their lowest level for years. Borrowing money for productive infrastructure investment would be a good deal. Interest rates are below or about the level of inflation.
Doug, even so, some ” fly by night ” temporary representative borrowing money with the repayments falling on the next 3 ( or more ) generations is morally wrong.
Just so they can pork barrel their next reelection makes it, in my books, criminal.
If it is wrong for this generation to ” live it up ” at the expense of future generations on the environmental front, it’s equally wrong on the economic front.
Interest rates will go up one day, and when they do, what then ?
GN: When I started work unemployment was less that 2% and all I had to do was work out which job I wanted. Companies like BHP thought it made good sense to pay people like me to study at university. My first job was helping to work out when the steelworks would get their coal from in 25 yrs. Those were the bad old days before free market globalization was seen as the magic answer to everything.
Someone leaving school now faces 18% unemployment and wonders whether they can get any job at all. Problem is that we have been so busy cutting costs and concentrating on what happens in the next 6 months that we haven’t had time to grow the economy fast enough to provide the jobs our school leavers need today.
Don’t rabbit on about saving money to protect our children’s bleak debt free future.
Jonh
The 3 decades, post ww2 were certainly dominated by low unemployment.
Then, it could be argued that Whitlams policies ushered in a new higher benchmark.
Inflation over 16%, high interest rates and huge welfare spending increases were also present.
Minimum wage and PS wage increases may have exacerbated the problem too.
The intergenerational burden I am much more worried about is that related to climate change and our plundering of the future through increasing carbon emissions.
Aren’t we forgetting the once in a civilisation need to curb our waste CO2 emissions in the attempt to retard Global Warming to ensure that future generations will have world worth living in? and,…oh….the massively irresponsible failure of due diligence to properly examine the available science and body of evidence on Climate Change on the public’s behalf and take appropriately responsible environment protection precautionary action, by both LNP Federal and LNP State governments.
The fact is that the cost of the economic stimulus during the GFC will be dwarfed by the consequential economic losses incurred by this bunch of neo-losers as a result of their 18 years of environmental foot dragging and blatant obstructionism. The young of today are unlikely to have an economy anything like that which we have enjoyed for the last 50 years.
The fact is that today’s fiscal short comings would be fully paid for by the improved standard of But today’s LNP are taking every action possible to cripple the transition.
That is a snap to Doug.
KN: If the unemployment problem was caused by Whitlam why didn’t it return to pre Whitlam levels under Frazer, Hawke, Keating, Howard Rudd, Gillard or Abbott?
It may be a coincidence but Whitlam was the one who started dismantling protectionism.
You might also ponder what effect the OPEC crisis had on the Aus economy.
As I remember it, one of the factors leading to Whitlam’s electoral triumph was the Coalition’s failure to rein in unemployment.
It was nudging 2.5 %.
Ahh, the good old days.
I think it was the other way around Zoot, Things had been going for so well for so long that the country was willing to take the risk of voting for Whitlam and his brave new ideas. The steady decline of the Libs, the failure of the Vietnam war, prime minister Billy McMahon and “Its time” all helped.
John
Fraser was as wet as water and couldn’t let go of all of Whitlams tax increases ( search Frasers recent contributions in the media).
By the time he got the arse, the structure was set in concrete.
Perhaps trying 1962-72 setting will help the unemployment problem.
( I’ll try finding out what they were , feel free to help 🙂 )
The dole in 71 was $11/week, in 74 it was $41/week. ( sorry, can’t link, Official Year Book of Australia )
Wow, %300 increase in 3 years !
From the AFR
Not surprising unemployment rose, incentivise not working with increased subsidies and disincentives working with increased taxes.
Carrots and Sticks.
KN: Whitlam didn’t raise tax rates. All the increases you talk about were the result of increases in income and bracket creep. If you want to do some research look at government expenditure as a % of GDP over the years.
When you are talking about taxes you also need to talk about what the government was paying for. Reducing taxes by forcing people to pay for something the government used to pay for can be a bit of an illusion. (Think of using GP co-payments to avoid the need for an increase in the medicare levy makes people at the bottom of the pile worse off.
The most important change that has taken place since the sixties is the reduction in protection. In the sixties governments had the power to change things in the Aus economy that they would be reluctant to do now because the result MAY be imports becoming more competitive. Free market globalization isn’t working very well now because of government powerlessness..
John
I’ll give that lot a response, with more evidence, tomorrow.
Gotta go earn some tax in the morn.
I won’t be thanked.