Business Daily Media

On rate-cut Tuesday, here are four reasons why the Reserve Bank shouldn't jump

  • Written by Mark Crosby, Professor, Monash University
image

Every first Tuesday of every month but January the Reserve Bank Board meets to decide whether to adjust interest rates. It announces its decision at 2.30 pm eastern time[1].

It ought to be an easy decision. Officially, the bank aims for a target inflation rate of between 25 and 3% “on average over the cycle.”

It’s has been the way the Reserve Bank Act has been interpreted since the early 1990s, with the view being that keeping inflation low is the best way it can support sustainable economic growth.

With inflation now showing no overall price rise[2] (0%) over the first three months of this year and only 1.3% over the past twelve months, it would seem incumbent upon the bank to cut rates - now - to get inflation back up.

But, for what it’s worth, here are the reasons I think it shouldn’t, at least not now.

Rate cuts don’t do what they did

First, interest rate cuts normally do their work by encouraging people to spend, which then feeds through intro price rises. However, it has long been understood by economists that at very low rates, further interest rate cuts may have only limited effects. With household debt already high, it is doubtful that a further cut will encourage people to borrow even more in order to spend more.

Of course another reason not to cut rates is the fact that an election will take place in 11 days time. It’s a difficult one for the bank. It quite rightly wants to be seen as independent. Cutting rates ahead of an election runs the risk of making it look as if it is trying to help the government, although ironically, at the moment a rate cut might help the opposition by putting beyond doubt its argument that the economy is weak.

All in all I think it would be better for the bank to wait a month until after the election, given that the need for a cut isn’t urgent.

House prices are still too high

A third reason not to cut rates is that the rate cuts we have had have distorted asset prices. House prices might have fallen, but the prices are still well above levels that would prevail if interest rates were normal. To cut rates now risks reigniting house prices.

The main reason why I think we shouldn’t have a rate cut is that we rely much too heavily on monetary policy (which is interest rates).

The main reason wage and economic growth is low because productivity growth is low. Lower interest rates will do little to lift it. The policies that might lift it have been few and far apart in the election campaign, but it is what we need, and it is difficult. The Productivity Commission[3] came up with a list in the first of its five-yearly productivity reviews. It’s key points were better health care, a better education system, taxes on unused land, better planning, and a properly functioning energy market and industrial relations system.

There are better ways to lift incomes

Instead, we run to the monetary policy teat at the first sign of economic weakness because it is easy and comfortable and has delivered before.

It is time also to reassess the Reserve Bank’s 2-3% inflation target. Weak consumer demand, demographic change and global competition might have created a new normal, meaning a target of 1-3% or even 0-3% might be more realistic.

Economists tend to dislike a zero inflation target because of the risk of missing and bringing on deflation, but inflation volatility has been low enough in recent years to make 1-3% target pretty safe and to stop us running to the bank each time things look weak.

Read more: Vital signs. Zero inflation means the Reserve Bank should cut rates as soon as it can, on Tuesday week[4]

Authors: Mark Crosby, Professor, Monash University

Read more http://theconversation.com/on-rate-cut-tuesday-here-are-four-reasons-why-the-reserve-bank-shouldnt-jump-116590

Business Reports

How to Ask for a Promotion or a Pay Rise

We’ve all been there – you’ve been waiting for the promotion that seems imminent, but then it never seems to come. It's hard to know how to ask for a promotion or a pay rise. Do you just go in and ask? Do you wait for yo...

Trump properties aren't the only ones to see wild valuations – putting a price on real estate isn't straightforward

40 Wall Street is one of the Trump Organization properties included in the lawsuit.Roy Rochlin/Getty ImagesOn the lower tip of Manhattan there is a prime piece of real estate, the price of which is somewhat up for debate. To the o...

Why shortages remain common 2½ years into the pandemic

A frequent sight during the pandemic.Diana Haronis/MomentShortages of basic goods still plague the U.S. economy – 2½ years after the pandemic’s onset turned global supply chains upside down.Want a new car? You m...

Liked and shared: How social media can elevate your customer experience

Don’t neglect this golden opportunity to connect with customers and win mind and market share. Is social media central to your business development strategy, or something you squeeze into your schedule, as and when? For man...

Optus | Commentary on governance, policy and procedure - Rackspace Technology

“This incident is all about governance, policy and procedure. You can have the best security solutions in place, but you are vulnerable to breaches without the right policies and procedures overlaid with effective governance...

Jucy to take over Apollo Tourism and Leisure

Major Tourism Merger Accelerates Rental Firm’s Trans-Tasman Expansion by Four Year's A merger between two of Australasia’s largest rental vehicle firms is set to advance the trans-Tasman expansion plans of a third major...

Web Busters - Break into local search

WebBusters.com.au