https://www.afr.com/policy/economy/rate-cuts-are-having-a-perverse-effect-on-the-economy-20191013-p5308x
Rate cuts are having a perverse effect on the economyDavid BassaneseColumnist
Oct 14, 2019 — 10.57am
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Like most economists, I’d hate to see the unemployment rate head much higher than it is now.
That said, I also agree with a small but growing number of analysts who think the official cash rate has already been cut too far, and even lower rates will probably hurt more than help meet our longer-term economic challenges. The same goes for attempting to further lower already very low longer-term interest rates through RBA purchases of government and corporate bonds.
Every pet shop galah is now talking about infrastructure spending.
— David Bassanese
At 5.3 per cent, the unemployment rate is indeed higher than it need be. And with underlying inflation still sub-2 per cent, inflation concerns are certainly no barrier to further macro-economic policy stimulus.
But so far at least, lower official interest rates have gone down like a lead balloon with households and business. Key measures of both business and consumer confidence are now lower than before the first RBA rate cut. Retail sales are still barely growing, and anecdotes from retailers remain relatively downbeat.
These results are even more disappointing when one considers the federal government has also showered middle-income Australia with an extra $1000 in their tax returns.
It seems many appear to have concluded that if the RBA is cutting rates to below what were once described as “emergency” levels, the economy must be experiencing an emergency. It’s time to tighten the purse strings.
In other words, rate cuts are having a perverse expectations effect on the economy.
Of course, one area where lower rates have helped is in reigniting the Sydney and Melbourne property markets. This could ultimately contribute to higher consumer spending through the so-called “wealth effect”, but at the cost of keeping house prices reliant on super-low interest rates and consumer spending reliant on super-high debt levels.
Zero-sum global currency war
Lower interest rates have also arguably helped keep the Australian dollar low, especially given the recent strength in iron ore export prices. But if this is what the RBA is aiming for, it’s as guilty as other central banks in engaging in the zero-sum global currency war. In fact, given the current level of the terms of trade, the $A appears undervalued and we’d better hope Donald Trump does not notice.
So what should be done? Every pet shop galah is now talking about infrastructure spending. More would certainly be handy, but such spending is already at a high level and it takes time for good projects to be developed and become “shovel ready”.
A far more direct means would be for the government to directly boost household income by bringing forward personal income tax cuts. Indeed, it’s especially galling – as pointed out by the RBA itself – that one of the big drags on household income growth in recent years has been a higher tax grab. Even more galling is that fact that the much heralded income tax cuts over the next few years will only partly hand back higher taxes collected through bracket creep.
And if low wages are the main economic problem, why not review wages policy more directly? Are worker bargaining provisions strong enough given high immigration, new technologies and globalisation? Are too many workers, such as students and foreign workers, being unduly exploited? What can be done to ensure more casual part-time workers get the full-time positions they desire?
So far at least, the RBA rate cuts don’t appear to be working. The current strategy of pushing rates even lower – and hopefully household debt even higher – may indirectly boost wage growth someday, but it’s a long and dangerous path for the economy.
David Bassanese is the chief economist for BetaShares Capital.
Oct 14, 2019 — 10.57am
Save
Share
Like most economists, I’d hate to see the unemployment rate head much higher than it is now.
That said, I also agree with a small but growing number of analysts who think the official cash rate has already been cut too far, and even lower rates will probably hurt more than help meet our longer-term economic challenges. The same goes for attempting to further lower already very low longer-term interest rates through RBA purchases of government and corporate bonds.
Every pet shop galah is now talking about infrastructure spending.
— David Bassanese
At 5.3 per cent, the unemployment rate is indeed higher than it need be. And with underlying inflation still sub-2 per cent, inflation concerns are certainly no barrier to further macro-economic policy stimulus.
But so far at least, lower official interest rates have gone down like a lead balloon with households and business. Key measures of both business and consumer confidence are now lower than before the first RBA rate cut. Retail sales are still barely growing, and anecdotes from retailers remain relatively downbeat.
These results are even more disappointing when one considers the federal government has also showered middle-income Australia with an extra $1000 in their tax returns.
It seems many appear to have concluded that if the RBA is cutting rates to below what were once described as “emergency” levels, the economy must be experiencing an emergency. It’s time to tighten the purse strings.
In other words, rate cuts are having a perverse expectations effect on the economy.
Of course, one area where lower rates have helped is in reigniting the Sydney and Melbourne property markets. This could ultimately contribute to higher consumer spending through the so-called “wealth effect”, but at the cost of keeping house prices reliant on super-low interest rates and consumer spending reliant on super-high debt levels.
Zero-sum global currency war
Lower interest rates have also arguably helped keep the Australian dollar low, especially given the recent strength in iron ore export prices. But if this is what the RBA is aiming for, it’s as guilty as other central banks in engaging in the zero-sum global currency war. In fact, given the current level of the terms of trade, the $A appears undervalued and we’d better hope Donald Trump does not notice.
So what should be done? Every pet shop galah is now talking about infrastructure spending. More would certainly be handy, but such spending is already at a high level and it takes time for good projects to be developed and become “shovel ready”.
A far more direct means would be for the government to directly boost household income by bringing forward personal income tax cuts. Indeed, it’s especially galling – as pointed out by the RBA itself – that one of the big drags on household income growth in recent years has been a higher tax grab. Even more galling is that fact that the much heralded income tax cuts over the next few years will only partly hand back higher taxes collected through bracket creep.
And if low wages are the main economic problem, why not review wages policy more directly? Are worker bargaining provisions strong enough given high immigration, new technologies and globalisation? Are too many workers, such as students and foreign workers, being unduly exploited? What can be done to ensure more casual part-time workers get the full-time positions they desire?
So far at least, the RBA rate cuts don’t appear to be working. The current strategy of pushing rates even lower – and hopefully household debt even higher – may indirectly boost wage growth someday, but it’s a long and dangerous path for the economy.
David Bassanese is the chief economist for BetaShares Capital.
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