Out-of-step Budget leaves heavy lifting to the RBA

Pity the Reserve Bank.
For several years now, successive governments have displayed a genius for getting the temper of the economic times almost exactly wrong, in the process forcing the central bank to do most of the work to prop up the economy.
Last decade they mortgaged the future by pretending the always-temporary mining boom would last forever, using the revenue windfall on transfers and handouts to families, superannuants and the corporate sector.
Now, just as confidence was returning and the property market had emerged from its post-crisis shell, the Abbott Government has unloaded with the sort of Budget you would expect to see for an economy in danger of over-heating – not one just ticking over.
The extent of the blow to confidence and growth is there in the numbers: a 16 per cent plunge in consumer confidence and the first drop in house prices in more than a year.
If the goal of Abbott and Hockey had been to knock the economy back on its heels, they could hardly have done a better job.
It means that the RBA’s hopes to move the official interest rate off its current “emergency low” have been postponed again, and instead a further rate cut must loom as a possibility.

At its meeting this morning, the RBA Board decided to hold the cash rate steady at 2.5 per cent, and it appears unlikely to be raising it any time soon.

As RBA Governor Glenn Stevens put it: “continued accommodative monetary policy should provide support to demand, and help growth to strengthen over time”.

Concerns that the property market was in danger of becoming overheated have receded for the time being, and inflation is unlikely to take off. In Fact, Mr Stevens thinks it will remain consistent with the central bank’s 2 to3 per cent target band “over the next two years”.
Instead, the economy might need more monetary policy air pumped into its tires – a move that might also, conversely, help deflate the stubbornly elevated exchange rate.

The sustained high value of the dollar is something the RBA, along with many others, remains bemused by: “The exchange rate remains high by historical standards, particularly given the further decline in commodity prices,” Mr Stevens said.
All of a sudden, a rate cut becomes tempting again.
But the bigger picture concern is that a historically low interest rate means the central bank has that much less ammunition if the global recovery falters and another crisis strikes.
And anyone who thinks that is improbable has obviously been hibernating in Antartica watching the glaciers melt.

Advertisements

Leave a comment

Filed under Uncategorized

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s