An expensive holiday

The RBA minutes confirm two things that were discussed in the press at the time of their last meeting.

  1. 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%?
     
  2. 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.

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Sacha
Admin
12 years ago

Particularly in the current situation, it may be useful to have a January meeting rather than attempting to optimise over two months.

JC
JC
12 years ago

Yea and if the Japanese go to zero interest rate policy (essentially monetization) this Friday which is quite likely and the Europeans do or say something aggressive at the next meeting we could find ourselves with an Aussie above 80 cents as the RBA is on holiday when it should be matching rate cuts. That’s very funny.

JC
JC
12 years ago

That’s actually very funny. It could end up costing more.

Fred Argy
12 years ago

I agree.

Francis Xavier Holden
12 years ago

When USA rates are around 0.25% – guess what Credit Card rates are ?

JC
JC
12 years ago

Dunno FXH.. Hit us with a number.

Francis Xavier Holden
12 years ago

jc – I get confused with how USA credit cards work but my understanding is its anything from 10% eipa for asset backed to 50% for no doc credit cards.

JC
JC
12 years ago

I dunno. Presume their rates are still over 10% on account of the large default losses they’re starting to incur. i read recently that they’re cutting limits like crazy.

derrida derider
derrida derider
12 years ago

I cannot understand this predilection of our central bank for “measured” moves when it is quite apparent that they will need further such moves in the near future. Why not go to where you think the optimum rate is in one hit?

It was plain as a pikestaff during the boom that it was going to take years of 25 basis points rises to get to where monetary policy could curb inflation – why waste those years? And it is now similarly apparent that it will take years of such small cuts to get monetary policy to where it needs to be to stave off recession.

There’s a reason credit card rates are both high and sticky. They’re sticky because users systematically underestimate the likelihood that they will ever pay that rate (they think they’ll have it all paid off before they incur it), so providers can’t gain much market share by competing on the rate. Instead they compete on the “generosity” of their credit availability, with consequent prudential problems. The rates are high as well as sticky partly because of the lack of competitive pressure on them (despite the large number of providers), and partly to cover the high default rates caused by this generosity.

I remember reading a good NBER paper on this years ago, but don’t have time to chase it.

JC
JC
12 years ago

I cannot understand this predilection of our central bank for measured moves when it is quite apparent that they will need further such moves in the near future. Why not go to where you think the optimum rate is in one hit?

Aren’t you assuming that they really can forecast forward with almost perfect foresight? To some extent they have to go slow in order to create the illusion that they know where they are going. Say they lowered rates to where they probably should be… 2%. What would happen in the market if they were wrong? The bond market would get trashed and people would begin to think they didn’t know what they were doing if they had to quickly change course. Going slow actually means they create the perception they are always right.

They also have to pay attention to what the other large central banks are doing. In a world in which we’re more or less reacting to overseas events our central banks has to go as slow as the other big players as our FX rate needs to be taken into account.