It is so odd to think that there is any debate about the RBA decision next week on interest rates. Odd too that it has taken so long for the RBA to understand just how weak the economy is and the fact that inflation is a dead duck.
Here we have a central bank that has presided over two and a half years of sub-trend growth, with the associated rise in unemployment, chronically low wages growth which is smashing real wages despite the fact that inflation is locked in the lower bound (or will soon be below) the bottom part of the inflation target.
There is also a unrelenting and largely unexpected free-fall in the terms of trade which is making a problematic set of economic conditions all the more risky. Yet there is confusion and uncertainty about whether the RBA will deliver only its second measly 25 basis point interest rate cut in close to two years when its Board meets next week.
Obviously, the RBA should have cut to 2 per cent late last year. There may be a little more confidence now, the Aussie dollar might be a little lower and some of the freed up cash flow of households and the business sector may have yielded a better economic performance but despite these beige shoot for the economy, a bit more sti,mulus is needed. But there is no point crying over lost opportunities and the RBA can and should cut the cash rate next Tuesday and signal, that unless we see real GDP growth on a path to 3.25 per cent in quick time, more cuts will be forthcoming.
It’s not that hard.
