The great interest rate debate
by Peter Switzer
This morning I want to do a quick update on Wall Street but then look at the interest rate debate now really hotting up with the Australian Workers Union (AWU) boss, Paul Howes, telling the Government to do something about the wrong-call merchants at the Reserve Bank!
As I have been advising this week in this column, there’s not enough out there to be panicking on and Wall Street proved it with the Dow up 0.7 per cent to 12,805.39 and the S&P 500 index up around 0.74 per cent to 1368.71.
The Beige Book, which puts the spotlight on the US economy, came out with good news and there was also a good start to the reporting season.
Over the next few weeks, economic data out of the USA and China will be really important and so will the calibre of company reporting. As I have been arguing, however, sell-offs will happen because the US market started so strongly this year with double-digit gains but that means a mild retracement makes sense. I maintain the “don’t panic recommendation” and buy the dips.
Now on interest rates, let me be clear on this — charting the course of interest rates in a two-speed economy is not easy. As a former academic economist, I get it; this is a big challenge.
I also know there’s no reliable economic model that tells the Reserve Bank (RBA) they’re right and that critics like me and now the Australian Chamber of Commerce and Industry as well as Paul Howes are wrong.
Cost benefit analysis
This is guesswork and it really is an exercise in cost benefit analysis. The benefit from the RBA’s reluctance to cut interest rates is that it is insuring against future inflation, higher interest rates and the impact on those who lose out with inflation, such as pensioners on fixed incomes. But there’s a cost and it’s a beaten up non-mining sector, a confidence-sapped consumer and a home loan borrower who’s too scared to borrow.
It’s hurting small business, their investment, their inclination to hire workers and it’s hitting our stock market.
Yesterday we learnt that consumer confidence is at an eight-month low and down 10.3 per cent on a year ago. The 12-month rolling average is now at a 31-month low!
Just about all data is pointing to the need for a rate cut and it is obvious that rates should have been cut in February and the cuts in November and December were about six months too late.
Wrong on rates
I never thought I would agree with Paul Howes but he’s right — the RBA has been getting it wrong on rates all year. I don’t think the government should interfere but the RBA boss should be open to more public scrutiny, just like Ben Bernanke who heads up the Federal Reserve in the US.
The Bank can afford to cut rates because Australians are so gun-shy about interest rates and they still carry a lot of debt. If inflation threatened, it would be easy to scare Aussies out of spending and borrowing by the RBA simply jacking up rates.
Being the Governor of the Reserve Bank of Australia shouldn’t mean that when you’re getting it wrong, you can’t say sorry and change strategy.
My fear is that stubbornness is getting in the way of objectivity. By the way, I’m not alone on this as there are many economists as well qualified as Glenn Stevens who think he’s wrong.
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Published on: Thursday, April 12, 2012
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