Why the RBA refuses to cut rates

Fri, 08 Sep 2017  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/1714473-004126949.html 

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Why the RBA refuses to cut rates

The forecasting record of the Reserve Bank of Australia is poor, but that has not stopped it relying on its forecasts, rather than hard data, when setting monetary policy.

In the past year where interest rates have been left unchanged at a level that is amongst the highest in the industrialised world, the RBA has been banking on its forecasts for stronger economic growth, a lift in wages and rising inflation to validate its failure to join the rest of the world with ultra low interest rates.

There are a couple of consequences of this approach from the RBA.

Importantly, despite its status, the RBA is made up or mortals. Sometimes its forecasts are wrong. And in recent years, the RBA forecasting record has been wide of the mark on growth, wages and inflation.

As the data has unfolded through the course of the past year or so, contrary to the rosy outlook from the RBA, economic sluggishness remains the order of the day.

Annual GDP growth is just 1.8 per cent, one of the weakest growth rates recorded in the last 25 years and now one of the weakest in the industrialised world. At the same time, wages growth has never been lower, at just 1.9 per cent. The level of labour underutilization – that is the sum of the unemployment rate and the underemployment rate – is over 14 per cent, a level usually seen when the economy is near recession.

Inflation, which after all is the main target of the RBA, is in underlying terms running at 1.8 per cent, and has been below the bottom of the RBA target range for almost two years. In the current global environment of low inflation, it is difficult to see Australia’s inflation rate moving much higher over the near term and has close to zero chance of exceeding 3 per cent, the top end of the RBA target range.

At the same time, Australia’s high interest rates relative to the rest of the world are a magnet for capital inflows to the point where the Australian dollar has rocketed back to 80 US cents. If sustained, this will act to dampen export income and will make it harder still for local firms to compete with importers.
In other words, an inappropriately high Australian dollar is working to slow an already soggy economy.

It is also quite clear that housing construction is cooling. This is not good news, not just for the next year or two of GDP, but it risks leaving Australia with a housing shortage if new construction lags population growth and other demographic changes. Lower interest rates would encourage new construction.

Everyone knows that changes in interest rates impact with a long and variable lag. That is, it takes something around 3 to 18 months for a change in monetary policy to impact on the economy. As such, forecasts are always going to be part of any policy deliberation.

But when the data confirm the forecasts of a year or two ago are consistently wrong and the errors are all in the same direction, remedial action – ie a policy catch up is needed.
In the mean time, the weak economic growth leaves around 725,000 people unemployed, and around 1.1 million underemployed. Had the RBA been a little more reactive to the data and less taken with its rosy forecasts and it had cut interest rates further to boost the economy, the number of people suffering for the lack of work would be materially lower.

And worryingly, the latest noises from the RBA suggest it is still upbeat about the outlook and has no inclination, at all, to cut interest rates.

This means that growth and jobs will be lower than need be for a while to come.

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THE LATEST FROM THE KOUK

Marriage equality – what’s God got to do with it

Sat, 23 Sep 2017

This article first appeared on the Yahoo7 website at this link: https://au.finance.yahoo.com/news/religious-marriages-slump-record-low-054148504.html 

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Marriage equality – what’s God got to do with it

The debate surrounding the survey on marriage equality is throwing up a range of issues that sit oddly with over 100 years of historical marriage patterns of heterosexual Australians.

Social media feeds, on line news, the radio, newspapers and television are heavy with people discussing the issue of marriage equality whose only real claim to be heard is their religious belief and their status within their church, synagogue, temple or other religious lobby group.

There are few, if any, declared atheists or marriage celebrants on these news and chat shows outlining their views on same sex marriage. This is despite there being more people of no religion than any other faith.

For some unknown reason, the overwhelming bias towards those with a religious affiliation promotes them to a point where they have a special status to pontificate as to whether people should vote yes or no to the marriage equality survey. Their views are getting a disproportionate coverage, including relative to how Australians are now choosing to get married.

For over 100 years, Australians getting married have been shying away from church based ceremonies and instead are opting for a marriage celebrant to allow them to legally tie the knot.

This alone should put the status of religious organisations and their spokespeople as authorities on the issue of marriage on very thin ice.

Penny-pinching on education leaves the nation lagging

Wed, 20 Sep 2017

This article first appeared on The Crikey web site at this link: https://www.crikey.com.au/2017/09/20/koukoulas-penny-pinching-on-education-leaves-the-nation-lagging/

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Penny-pinching on education leaves the nation lagging

Educational attainment is a proven path to higher incomes, not only for the individual concerned, but also for the nation as a whole.

The latest research from the Organisation for Economic Co-operation and Development, Education at a Glance 2017, shows that in each of the 38 countries in the survey, adults with below upper secondary education were paid an average 25% less than someone with upper secondary education. There was an even more extreme difference with a 56% average pay advantage for those attaining a tertiary education against upper secondary schooling.

Put together, this means that someone with a tertiary education will, on average, get roughly double the income of those with below upper secondary education.

The public policy implications of these findings should be obvious.

The first step should be to ensure that all children get fundamental reading, writing and arithmetic skills, without which completion of upper second education is impossible, let alone the step to tertiary education.
Targeted, sufficient and productive public investment in human capital (education) via skilled teachers and high level, up to date resources for students are a bare minimum. Any shortfall in this infrastructure to provide a good start to education will show up in a short fall in educational attainment in later life with negative implications for the economy.