The RBA minutes confirm two things that were discussed in the press at the time of their last meeting.
- It was on the 2nd Dec (that is a few months after it had become apparent that the world was facing the greatest financial crisis since the great depression and that the developed world appeared to be sliding inexorably and quickly into a recession) that it had become appropriate to move beyond a neutral monetary policy to one that was expansionary. Like most other people, I’m pleased to see the RBA acting faster, much faster than it did in 1990. But I wondered then like I’ve wondered this time around, when it’s quite clear that we need to take our foot from the brake to the accellerator what exactly is the point in waiting to get to some rough approximation of where we need to be? As we wait for the juggernaut, shouldn’t home loan rates be a lot lower than 6.5%?
- That one reason for a large cut in interest rates was the holidays. In the words of the minutes
Members also took account of the fact that a Board meeting was not typically scheduled in January, given that local markets tended to be relatively thin over the summer break and statistical and survey data, as well as liaison information, were less timely. Overall, members judged that the two-month break between meetings was one consideration in favour of a substantial reduction in interest rates at this meeting.
Now let’s do some back of the envelope figuring. Let’s say that it’s entirely possible that this delay leads to interest rates being set wrongly for some period of time. Let’s say that this wrong setting leads to a one off loss of economic growth of 0.1% of GDP. At a little over $1 billion dollars, that’s an expensive holiday.