The remarkably simple case for an RBA rate cut

Mon, 18 Jun 2018  |  

This article first appeared on the Business Insider website at this link: https://www.businessinsider.com.au/rba-rate-cut-2018-6

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The remarkably simple case for an RBA rate cut

The performance of the Australian economy is a bit like my old report cards at school: “Doing reasonably well, but could do better”.

Unlike my approach to school work, which only impacted me, the current policy complacency is seeing unemployment rise, wages growth remain in the doldrums and our $1.8 trillion economy underperform. In the latest test of economic growth, the 3.1 per cent annual GDP growth rate for the March quarter was reasonably good.

It was close the long run trend and a welcome result given the performance of the economy in recent years.

Alas, it is probable that this 3.1 per cent growth rate will turn out to be a “one-off” spike, with some pull-back in the June quarter highly likely from a lower contribution to GDP from net exports, inventories and government demand. When the June quarter national accounts are released in early September, annual GDP growth is likely to slip back to around 2.7 per cent.

The 3.1 per cent growth also needs context. It followed a very ordinary growth rate of 2.4 per cent in the prior quarter, and in the last 5 years, GDP growth has averaged a mediocre 2.4 per cent.

Think of a football team in the bottom half of the competition that has a one off win again the league leaders, and that sums up the GDP result.

Context is important.

It remains a mystery why there has been a near universal lowering in expectations on what makes the Australian economy strong.

A few years ago, most pragmatic economists would judge a ‘strong’ economy to be one that is delivering a tighter labour market, in particular lower rates of unemployment and underemployment, a pick up in wages growth, higher rates of capacity utilisation and inflation bouncing around 2.5 per cent, the middle of the RBA target.

The opposite is happening in Australia right now. Around much of the industrialised world, unemployment rates of 4.5 per cent and lower are the norm.

In the US, the unemployment rate is 3.8 per cent; in the UK, it is 4.2 per cent, Germany 3.4 per cent, Japan 2.5 per cent, New Zealand 4.4 per cent.
Australia’s unemployment rate, at 5.6 per cent, is ugly in comparison, particularly given underemployment is simultaneously close to a record high 8.4 per cent. And unlike these countries where unemployment is falling, over the past six months, the unemployment rate in Australia has been increasing.

The questions about lifting growth and reducing the unemployment rate are not all that complex, but they are shunned and avoided because of a misguided economic theory linked to perceptions of financial instability and responses to deal with a rise in asset prices.

Easier economic policy stimulates economic growth, lowers unemployment and underpins higher wages.
It is simple. Remarkably simple.

With fiscal policy at least partly constrained by the objective of returning to budget balance and then surplus, the other arm of policy open to kick start growth is monetary policy.

Interest rate cuts would have multiple effects. It would free up cash flow for the business sector and households with debt, cash flow that can be allocated to investment and spending.

Lower interest rates are also likely to lower the threshold at which investments are viable and as a result would underpin stronger business investment.
It is also likely that lower interest rates would mean, at the margin, a lower level for the Australian dollar which would support exports and domestic import competing firms.

It seems a no brainer for anyone interested to lowering unemployment and boosting wages.

“Housing” I hear you shout. Wouldn’t lower interest rates spark a resurgence in the house price boom?

The short and categorical answer is no.

This is because any move to lower interest rates could be and should be accompanied by further regulatory restrictions on mortgage lending – perhaps an extension of existing rules on loans.

Ending negative gearing and building more dwellings would also work to dampen house prices. And it is interesting to note that in some parts of Australia – Perth and Darwin in particular – house prices have slumped in recent years despite lower interest rates.
There is much, much more to house prices than just interest rates.

If the RBA was to cut interest rates to 1.0 per cent or less over the next few months, the risk that inflation would exceed its target remain remote. Nor would it fuel a rebound in house prices, if the other regulates kept a firm hand on lending rules.

It would, importantly, help to lift economic growth, lower unemployment and help kick start a much needed lift in wages.

And guess what? If I am wrong and it did unexpectedly underpin an surge in inflation and lead to an overheated economy, the RBA could remove the monetary policy stimulus and hike rates.

Monetary policy is a lever that can be pushed and pulled to fine tune part of the economy. It should be used more often.

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My house price bet – I’m very happy and getting ready to collect

I recently made a bet with Tony Locantro, Investment Manager with Alto Capital in Perth on the extent to which house prices would fall over the next three years.

Just to reiterate, the bet centred on Locantro’s view that prices would drop 35 per cent or more by the end of 2021 from the peak levels in 2017, a forecast that looked absurdly pessimistic given the raft of factors that influence house prices over the course of years.

For Mr Locantro to win the bet, house prices measured by the Australian Bureau of Statistics on a quarterly basis in either Sydney, Melbourne or for the average of the eight capital cities would need to fall by 35 per cent or more from the peak levels by the time the December quarter 2021 data are released. The ABS released the latest residential property price data last week which presents an opportunity to see how the bet is unfolding, admittedly with three years to go until it is settled.

As everyone knows, house prices are falling in most cities, reversing part of the boom over several decades.

Get ready for a cash rate cut in April

Mon, 25 Mar 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/get-ready-cash-rate-cut-april-193244245.html

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Get ready for a cash rate cut in April

The data is in and it is compelling.

The Australian economy is faltering and the risk is that it will weaken further if nothing is done to address this decline.Not only has there been recent confirmation of a per capita GDP recession – that is, on a per person basis the economy has been shrinking for two straight quarters – but inflation is embedded below 2 per cent, wages growth is floundering just above 2 per cent, house prices are dropping at 1 per cent per month and dwelling construction is in free fall.

Add to this cocktail of economic woe an unambiguous slide in global economic conditions, general pessimism for both consumers and business alike and a worrying slide in the number of job advertisements all of which spells economic trouble.Blind Freddie can see that there is an urgent need for some policy action. And the sooner the better.For the Reserve Bank of Australia, there is no need to wait for yet more information on the economy.

It has been hopelessly wrong in its judgment about the economy over the past year, always expecting a growth pick up “soon”. Instead, GDP has all but stalled meaning that inflation, which is already well below the RBA’s target, is likely to fall further.In short, no. It is not like a 25 basis point interest rate cut on 2 April and another 25 in, say, May or June will reignite inflation and pump air into a house price bubble.

Such a claim would be laughable if there are any commentators left suggesting this.