The strange thing about RBA Governor Glenn Stevens testimony to the Parliament today was his agnostic approach to a horribly weak labour market.
Stevens suggested an unemployment rate at around 6.25 per cent and likely to stay there for a couple of years was “kind of OK”. The 789,000 people unemployed (plus another half a million underemployed) may beg to differ.
He was correct to note that the record low growth in wages that our flexibale labour market is delivering, would in time help to reverse the rise in the unemployment rate, but only when the pace of economic growth moves back above trend.
Stevens reckons the economy is in for another year of sub trend GDP growth so I suspect he may be a little too optimistic in thinking that the unemployment rate will not rise over the next 12 months which will no doubt keep real wages in check and with it, inflation low.
Would a 7 per cent unemployment rate this time next year still be OK?
Of course, there is only so much Glenn Stevens, the RBA and monetary policy can do, but when we know with near certainty that fiscal policy is not adding much to the economy and commodity prices are still dropping, the path of least regret may be to consider what harm 50 basis points of interest rate cuts would do.
Inflation, having edged up late in 2013 and early 2014, now looks to be easing back, aided by the over-valued Australian dollar and dreadfully weak wages growth.
Interest rate cuts would, at the margin, take away a bit of support for the Aussie dollar, would allow market players to take on more risk (something else Stevens would like to see happen) and all the while, the inflation rate would be fly-papered to the RBA target band.
The RBA is the only one carrying the policy can in Australia right now with the government hell bent on fiscal tightening.
In these circumstances with below trend growth, a high and rising unemployment rate, a currency that is hurting the traded goods sector and risk still a dirty word, why not cut interest rates?
