The Reserve Bank of Australia (RBA) was quite right not to increase the overnight cash rate yesterday.
Having run their mortgages and credit cards up to record levels, the GFC has brought about a Pauline conversion amongst Australians. They’ve come to their own conclusions, because neither the RBA nor APRA (the Australian Prudential Regulatory Authority) had really warned them their household debt load had become nigh on impossible. Whilst people were waking up by themselves, the RBA and APRA remained asleep on the job.
In an article in THE AGE on 15 June 2005, I warned that the RBA shouldn’t increase interest rates because Australia’s “economic growth is primed to tank into a major deflation”.
Nevertheless, the RBA subsequently ratcheted the cash rate up from 5.75% to 7.25% over the next 27 months to 5 March 2008, before proving me right by having to drop it by 4.25% (to 3%) in a period of only 7 months!
But if I was ahead of the pack in foreseeing a drop in property prices in Australia and around the world as early as 2005, I’m surely not now? Is it not fear of a worsening global financial collapse that Australians have ‘deep pockets’ and our retail industry is now suffering so badly?
By not understanding the real problems faced by Australians, misguided RBA monetary policy has added to retailers and mortgage-holders deep concerns. Increases in the cash rate has made it more difficult for both. It has also sent the Australian dollar higher than it should be, thereby damaging our exports.
So, whilst it is the job of the RBA to attend to stability of the currency and full employment, it is its third criterion, the economic prosperity and welfare of all Australians, which is most important right now.
May I remind RBA governors that whilst Australians aren’t spending, whilst real estate values are declining and the dollar remains too high, it is STILL not the time for the RBA to even consider increasing interest rates. A reduction is more appropriate.
In the current financial environment it’s only superficial commentators, unaware of the overarching concerns of Australians, who could believe otherwise .
It helps to understand that taxation and land price escalation is responsible for most inflation – and there certainly aint going to be much increase in land prices from hereon in!
So, get with the program, RBA!
2 thoughts on “Surprise, Surprise – RBA gets it right!”
I disagree that inflation targeting is the main criterion at the moment, James. We’re caught in a debt and asset price deflation. The economy and people have to be got working – and that means lower interest rates.
But I agree with you that we could well do without the RBA, however unlikely this may be as the moment.
The housing bubble is destroying Australia. The RBA has obviously abandoned the notion of inflation targeting. All the readings pointed to a need for the RBA to lift interest rates yesterday – inflation is well outside their comfort zone, the housing bubble is still fully inflated, unemployment is low, and the mining boom is funneling huge amounts of money into the economy. But the RBA chose to sit on their hands and allow inflation to continue bursting outside their 2-3% target range. There’s a lot of information here – http://australianpropertyforum.com/topic/8943962 – about why the RBA abandoned its inflation target, and the problem now is all this money flooding into Australia is inflating retail prices but leaving us with nothing to spend because we have directed all the money into repaying debt on overpriced dwellings. Ridiculous. Sack the RBA!