Mark Crosby explains – I couldn’t agree more.
The RBA released minutes of their most recent meeting yesterday. Debate in the press today about the merits of the RBA keeping their powder dry, or whether they should have cut further. The minutes end with
The question for policy was whether further stimulus should be added at this meeting, or whether, having reduced rates at each meeting since September, the Board should pause for a further evaluation of the situation. Members could see reasonable cases for both courses of action. On balance, they judged that, having made a major change to monetary policy over the preceding several meetings in anticipation of weak economic conditions, the best course for this meeting was to leave the cash rate unchanged. Members believed this would leave adequate flexibility for policy at future meetings.
Alan Oster likened the argument for holding fire as like waiting for the hole to get deeper before trying to dig yourself out. I agree with him on this. There is no sense waiting for further evidence of deteriorating local and global conditions. Delaying cutting just delays the normal response to monetary loosening – Japan made the mistake of waiting too long to cut real interest rates in the early 1990s – eventually inflation became deflation, and it was not possible in the end to deliver the negative real rates that Japan needed to help stimulate recovery. One issue is why central bank interest rate changes are positively autocorrelated. If a new piece of information about the economy arrives that affects the desired target cash rate there is no theoretical reason not to go straight to the new target cash rate. The fact that rates were cut for several meetings after September suggests that cuts made late last year should have been larger, particularly after the consistent bad news of Q4 when it became evident how poorly the global economy is travelling. The cash rate should have been 2% or below by January this year.
I liken the argument to the captain of the Titanic seeing the iceberg and saying ‘this ship takes a long time to turn round, so it would be silly to change direction too suddenly. I’ll just turn the rudder a few degrees and review the situation in a few minutes. Don’t want to give away all my ability to turn – what if I need to turn more in a few minutes.