Every cycle of monetary policy seems to bring forward some piece of confused thinking that somehow turns up centre stage. It’s not as if monetary policy is easy – given the inevitable level of ignorance and the long and variable lags in the effect of monetary policy. But central banks have to make difficult decisions – like courts. And then they have to justify them. And it’s tricky. And though I have the greatest respect for their predicament I recall asking when the RBA last reduced rates in a recession in the early 1990s, I asked why, once we were confident that we’d slowed the economy down, we didn’t lower rates faster. I was told that it takes a long time for interest rates to work so we were lowering them gradually. (The obvious analogy is being on the Titanic and seeing the iceberg. The rudder takes a while to have much effect, so we just move it
s l o w l y
to its new position.)
The more recent version of this is ‘keeping your powder dry’ holding off on using your ammo. With the greatest respect to Rory Robertson, here he is buying into this line explaining how the RBA’s policy of leaving rates where they are is justified if things turn up in the future. And . . . also if they turn down.
If the RBA really had wanted to deliver a further substantial drop in key lending rates, it would have cut its cash rate more forcefully. Bigger cash rate cuts may well turn out be necessary down the track, but for now the RBA is happy to sit and wait and watch, either hoping for better times ahead or saving its ammunition for darker days, or more accurately – both. That is,the RBA is hoping for the best but remains prepared for the worst. Like the rest of us!