Dr Brendan Rynne, KPMG Chief Economist, comments on RBA decision
While the decision by the RBA today to cut the cash rate by 25bp to 0.75 percent was priced into the market as a near certainty, the factors influencing the outcome were certainly not straightforward.
Despite the need to help stimulate the domestic economy, the continuing fall in interest rates runs the risk of fuelling the re-emergence of a price bubble in housing in Sydney and Melbourne.
In some regards the drop in the cash rate was necessary as a defensive foreign exchange measure to ensure Australia’s competitiveness is not eroded by the RBA sitting still while other central banks seek to engage their currencies as a tool for stimulating domestic growth.
But the drop in the cash rate now pushes Australia closer to the position of needing to use more aggressive, non-conventional forms of monetary policy intervention to help the stimulate the economy.
Modelling by KPMG Economics has shown business and housing investment is less responsive to a drop in interest rates when the cash rate is already below 2 percent than when the cash rate is at more “normal” levels; and the likelihood is that even these reduced stimulatory effects will dissipate further as the cash rate approaches the lower bound of 0 percent.
As conventional monetary policy becomes more ineffectual, non-conventional economic stimulatory approaches, such as quantitative easing and “helicopter money”, will need to be employed as a way of putting cash in the hands of the public to spend.
We have not reached that position yet, but what is missing at the moment is a short, sharp fiscal boost that enables money to reach consumers who will spend. This is predominately low to middle income households who typically spend rather than save. Raising Newstart would be a way of doing this.
More widely, KPMG continues to advocate for Australia adopting a comprehensive agenda of fiscal policy measures targeted at the short-medium term, allied to productivity reforms and tax reforms rebalancing tax receipts away from Corporate and Personal Income taxes and towards a higher consumption tax mix.