Well - the RBA cut rates

Tue, 03 Feb 2015  |  

Well, the RBA did it. And almost no one saw it coming. The RBA cut the official cash rate to 2.25 per cent and in doing so, has acknowledged the following things that have been evident for 6 months:

On going below trend GDP growth:

High and rising unemployment:

Record low wages growth:

A terms of trade fall with few historical precedents.

Ouch.

If only the RBA had noted these issues a few months ago and sliced interest rates when it was obvious some policy stimulus was needed, maybe the economy and confidence would be a little better now. And a few more people would have a job.

Alas, the RBA was wedded to some rubbish in, rubbish out economic modeling that suggested, well, who knows what other than don't cut interest rates.

For the sake of a few tens of thousands of workers, actual and potential, the RBA action can now save jobs. And as the actress said to the bishop, "it's better late than never". Its collective closed mind towards global and domestic disinflation risks has seen policy too tight for too long, it has risked too many people being unemployed in 2015 and the economy being too weak. Why it failed to cut in late 2014 is a mystery, perhaps explained by the oompa loopa approach to recruitment and sharing of ideas at the Bank.

Moving forward, there seems to be a strong case for more interest rate cuts in the months ahead. For some time now, I was judging a 1.5 per cent cash rate to be needed during 2015 to reverse the weakness in the economy and there is no reason to change that view.

Next big issues for the RBA will be the information on commodity prices, unemployment, inflation and growth. Any more weakness here and my call of a 1.5 per cent cash rate may well turn out to be too high. 

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