Interest Rate Cut is no Gold Star for Treasurer
4 October 2012
Wayne Swan is claiming no, demanding credit for the Reserve Bank's interest rate cut.
In quivering fear of being lashed again by the Treasurer's tongue, I'm willing to accede. Take it Wayne, take all the credit for:
• THE resources boom coming to a
• IMPORTANT parts of the
economy, such as housing and retail,
operating under great stress; and
• AN overvalued Aussie dollar
shredding manufacturing and
making life tough for tourism
operators that depend on overseas
There's a surreal perception about interest rates which has taken hold in Australia, that our Treasurer in the full flowering of his unknowingness continually embraces and projects.
This is that an official interest rate cut is the Reserve Bank sticking a gold star on the economy and putting an even bigger one on the Treasurer's exercise book, as if he were still at primary school.
Well done, young Wayne!
In Wayne's World, the US and European economies and their respective finance ministers, must have gold stars stuck all over the place, awarded for cutting their
rates all the way to zero.
Does Wayne sincerely believe that the US and European economies have been delivering
gold star performances?
At its most basic, a cut in the official rate, is completely value free. It is certainly not a gold star; both it and indeed an increase in rates, is just the RBA doing its job.
That is, the RBA is adjusting rates to respond to what is happening in the economy or being done to the economy, to best deliver sustained low inflation growth in the economy.
But more specifically, a cut in rates to the levels we are now at, is tellin us two big and disturbing things:
That either the economy is grinding to a stop or we are headed for a big problem next year. Or some combination of both.
Does our Treasurer really want to take "credit" for that? Especially when the RBA's decision is completely non-judgmental. It's not blaming the Treasurer for anything. Not even irresponsible fiscal policy.
The RBA has determined that inflation is not going to rear its head in any would send the prices of imports up sharply. But even with some fall which the Reserve Bank would like to see but which it is not going to try to trigger the inflation threat would remain minimal.
While it does not see the economy grinding to a halt, the RBA is considerably less convinced than the Treasurer that everything is coming up roses.
Some sectors of the economy could do with a boost from lower rates; and the economy overall could benefit. In short, it was able to cut, so it cut. And given all that,there was no point in waiting.
Does it also mean we are headed for a, to put it gently, "big problem"?
No, not necessarily. But the RBA can see plenty of threats out there. Europe will remain
mired in a mess at best, and could always trigger a GFC-like "event". The US is struggling to come out of stall speed.
And the most important of all,China is a riddle. A worrying riddle, if not yet a disturbing one.
None of this is the Treasurer's fault. Just as the RBA's prudence is not his gold star either.