RBA should go entrepreneurial
by Peter Switzer
Today I wanted to share my view on interest rates that I put to my readers in last week’s The Weekend Australian,and I really wanted to share my outside the square view on how our Reserve Bank (RBA) should be thinking and acting, so here goes.
Just before that, for the record, this is how Wall Street finished ahead of the US election. The Dow put on 19.28 points or 0.15 per cent to 13,112.44 and the S&P 500 increased 3.06 points or 0.22 per cent to 1417.26. By the way, stock market history shows a Democrat president and Republican dominated Congress and a win for an incumbent president is best for stocks.
A short history of rates
At the risk of being tagged “predictable”, the RBA has a chance to right its past wrongs by discarding its careful public service mentality to adopt a more entrepreneurial stance.
Recent media reports on the history of Cup Day rate changes show we have seen a cut or rise from the Bank every year since 2006, but the real story has been ignored. On 7 November 2007, six days after the Global Financial Crisis started with a stock market collapse, which potentially threatened a Great Depression, the RBA raised rates, taking the cash rate up 25 basis points to 6.75 per cent.
At that time, the underlying inflation rate was 0.9 per cent for the quarter while the annual figure was nearly three per cent. In fact, the RBA kept a tightening bias, hiking again in February and March 2008, jacking up the cash rate to a whopping 7.25 per cent.
Getting it right
It then went quiet until September when they sheepishly tried a 0.25 per cent cut but when Lehman Brothers failed on 15 September 2008, and it was obvious that the you know what was going to hit the fan, the Bank then went gutsy with a 100 basis points cut, leading the world on what was to be the right policy after a year of getting it terribly wrong.
Sure, the underlying rate was at the top of the two to three per cent band that the RBA has set for itself, but sometimes, in business, and it should be for public policymakers too, gut feelings or maybe business acumen need to be used to question hard cold numbers.
The great entrepreneur
My old professor at UNSW, Gordon Rimmer, once gave me the best definition of a great entrepreneur. He’s someone — Gordon was a Scotsman pre-women’s lib — who makes the right decision at the right time even if he is on the golf course.
Now we know the latest inflation read was 1.4 per cent for the June quarter but this had carbon tax electricity price rises in it. Underlying inflation is still only 2.5 per cent and yes, you’d like it to be lower but the economy still needs help and a Cup Day cut would help.
Among the data
Last week’s data screamed “give us another cut” with RP Data showing capital city home prices down one per cent in October and 1.1 per cent for the year.
The Performance of Manufacturing index rose by 1.1 points to 45.2 in October but as the number is under 50 it says that manufacturing has contracted for eight months in a row.
Then we learnt export prices fell by 6.4 per cent in the September quarter and it’s just more proof export income is falling.
With Europe still a big question mark and the threat of the US fiscal cliff possibly forcing the Yanks into a recession, the RBA should show some entrepreneurial rocks and cut now before it’s too late.
Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Published on: Tuesday, November 06, 2012
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