The RBA holds on to an on hold position

Tue, 02 Dec 2014  |  

The penny still has not dropped at the RBA. A weaker than expected world economy, a commodity price dump and persistently soft domestic demand are an economic problem for Australia but the RBA is reckoning that "monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target".

I don't agree, but let's have a look at how the RBA is getting things wrong.

The Statement from the RBA released today that accompanied the on-hold decision noted the following points (my comments are in the square brackets in bold):

"Growth in the global economy is continuing at a moderate pace." [Yes – and this is not good for Australia]

"key commodity prices have declined significantly in recent months, reflecting somewhat softer demand and, more importantly, increased supply." [Yes – and this is not good for Australia]

"In Australia, most data are consistent with moderate growth in the economy. Resources sector investment spending is starting to decline significantly" [Yes – but this is not good news for jobs]

"the Bank still expects growth to be a little below trend for the next several quarters." [Yes – this is not good news for jobs]

"the unemployment rate has edged higher. The labour market has a degree of spare capacity and it will probably be some time yet before unemployment declines consistently" [It sounds like there is not enough stimulus to the economy to reverse this undesirable economic outlook]

"the Australian dollar remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices in recent months. A lower exchange rate is likely to be needed to achieve balanced growth in the economy." [This has got to be a headwind for the economy if no other action is taken]

As I have been banging on about for at least three months now, the RBA needs to cut and cut more than 25 basis points. I remain confident that the RBA will indeed cut the cash rate to around 1.5 per cent during 2015 as it works to tackle disinflationary pressures from a persistently subdued economy. This is a scenario where the Australian dollar is likely to continue to fall, perhaps quite sharply and 0.7500 or thereabout would be no surprise for this time next year, but nor would 0.7000 for that matter.

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