Saturday Sanity Break, 18 January 2020 – Rate cuts ‘madness’
Increasing numbers of economists and journalists are questioning the RBA’s arguably nutty rate cuts. I am reminded of a discussion in the RBA’s Executive Committee many years ago when the boss got down to tin tacks. ‘I’ve read the act carefully. I can’t be sacked unless I am deemed to be mad - (thoughtful pause and wicked look) …And how would they know!’ It was one of the Boss’s better jokes, perhaps his only joke.
What would gov’nor Lowe say if he read the front page of the Weekend Australian Oz today? Especially comments by Warwick McKibbin, former RBA board member and perhaps Australia's finest economist.
‘Booming share prices, record household debt and a resurgent property market are increasing pressure on the Reserve Bank to hold fire on further interest rate cuts, despite the economy absorbing a hit from the bushfire crisis, which has rocked the agricultural and tourism sectors.’
Consumer inflation is under control but household debt is still rising – well into the danger zone – and house prices are are rising again, madly many people think. And share prices have smashed through the 7000 barrier, making rich share investors richer.
Writing as a graduate student with Claudio Borio at the Bank for International Studies in 2002 ‘, Philip Lowe wrote as follows:
'If the risk of this occurring is significant, then a slightly modified policy regime, under which the central bank responds not only to short-term inflation pressures but also, at least occasionally, to financial imbalances, may ultimately deliver a better combination of monetary and financial stability.
'Under such a regime the central bank might opt for higher interest rates than are justified simply on the basis of the short-term inflation outlook if there are clear signs of financial imbalances, such as if credit growth is rapid and asset prices are rising quickly. The justification for doing so could be that the higher interest rates could help contain the financial excesses, and in so doing reduce the probability of future financial instability and possibly a sustained undershooting of the inflation objective.’
I think it is appropriate to ask Dr Lowe a question. Why do you think that with cpi inflation low (and well within the RBA’s agreed range of 2-3 %), why are you cutting rates while housing debt is rising and in the danger zone, house prices are rising again and share prices are setting new records?
A second question, one for another day, is as follows. Sensible economists agree that consumer inflation is theft. Why has the RBA agreed with the 2-3 % target range? Do the math, Dr Lowe, and ask why you are complicit in a policy that is ripping off people and companies in the private sector.
What a welcome change if your monthly effusion of words addressed one of these questions per month. I can provide other questions if your staff or board members fail to provide a good question each month.
Fiona Prior sees the Stephanie Lake Company’s ‘Colossus’ and thinks both of 'group think' and Ester Williams! An unlikely combination. More here.
No tennis on the box yet, or not that Henry and Mrs T can find. Thank goodness the heavy rain seems to have cleared the aire in Melbourne, and perhaps also great that Ash Barty seems to be finding her game when it matters.
Bushfire donations have reached $5 million from the Oz open contributors, and we also thank Shane Warne for auctioning his test match cap for $1 million for the same cause.
The Aussie one day cricket team made a brave effort to overhaul India’s monster first innings score. So it is one each, with a third game on, is it next Friday? And the Aussie shielas pad up soon for the T20 world cup.
And soon footy will be underway and life will return to normal.