Brendan Rynne, KPMG Chief Economist, comments on latest RBA rate cut.
I predicted the RBA would reduce the cash rate today by another 25bp, as it did last month – but unfortunately this drip-feed approach will lack the psychological impact and ‘bang’ factor of a 50bp drop in a single month.
There was a strong argument for leaving things alone last month and this – but having decided not to keep its powder dry, the RBA really needed to make it count as much as possible at these already low rates. A couple of 25bp cuts might seem prudent but just validates the assumptions of the bond markets assumptions which have already priced these cuts in, so they won’t cause the economy to overheat in the short to medium term.
By cutting rates, the RBA is sending a signal to the market, to politicians and to the community at large, that the Australian economy is not firing on all cylinders, and as one of the guardians of national welfare, the RBA is looking to help out where it can.
Either way, 1 percent is likely to be close to the lowest rate before more aggressive, non-conventional forms of policy intervention would need to be considered. That’s not to say the RBA should stop adjusting the cash rate once it hits 1 percent when 0 percent is the actual lower bound; rather, cutting rates below 1 percent is unlikely to be effective in reducing the interest rates faced by businesses and households.
In those circumstances conventional monetary policy is ineffectual and non-conventional approaches such as quantitative easing and “helicopter money” would need to be considered, to put cash in the hands of the public to spend.
We have not yet reached that position. But it is already abundantly clear that monetary policy won’t do all – or even most – of the heavy lifting to stimulate the economy.
So this really puts the onus on the government to bring forward fiscal stimulus – by getting new targeted infrastructure projects up and running and ensuring the proposed tax breaks are brought into law soon as possible.
We need a mechanism to get money out to consumers to spend; particularly low to middle income households who typically spend rather than save.
It looks like the budget deficit will be narrower than previously forecast – so we need to use that extra cash in a tax rebate for the FY19 year, which will give people an incentive to get tax returns in. Extra payment to welfare recipients should also be considered.
The government needs to do this expeditiously – not so fast that mistakes are made but not too slowly so that the economic benefits are reduced, as we are seeing with the cash rate cuts. Giving businesses a boost through asset write-offs, as the Trump administration did in the US, should also be considered.
Australia needs a comprehensive agenda of fiscal policy measures targeted at the short-medium term, allied to productivity reforms, investment in infrastructure, and tax reforms rebalancing tax receipts away from Corporate and Personal Income taxes and towards a higher consumption tax mix.