The Reserve Bank of Australia is becoming ‘conventional’

Today:

The Reserve Bank of Australia has lowered the cash rate to 1.5% in an effort to stimulate growth, boost inflation and encourage a fall in the Australian dollar.

The cut of 25 basis points from 1.75% is the last decision from outgoing RBA Governor Glenn Stevens. In a statement on the rate decision he says:

“Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes.”

In addition:

In his statement, Glenn Stevens also addressed the concerns around Australia’s property market. He noted Australia’s banks have been cautious in lending to certain sectors like the property market and despite the possibility of a considerable supply of apartments emerging over the next few years, lending for housing has slowed this year.

It seems the RBA has ‘unlearned’ the lessons of 2008. Then it did not suffer a recession because, contrary to what most major central banks, it did not allow NGDP to tank.

What supported domestic demand was an adequate monetary policy that kept spending growing close to a stable trend path. Maybe because of worries about house prices, monetary policy has been overly tight for the past two years, despite the drop in the policy interest rate.

Australia Aug16_1

Australia Aug16_2

Australia´s monetary policy statement says:

In determining monetary policy, the Bank has a duty to maintain price stability, full employment, and the economic prosperity and welfare of the Australian people. To achieve these statutory objectives, the Bank has an ‘inflation target’ and seeks to keep consumer price inflation in the economy to 2–3 per cent, on average, over the medium term.

The chart shows that since 1992, when the target was set, inflation has averaged 2.5%. The RBA couldn´t have done better! Soon we´ll hear Steven Williamson say “Told you so; interest rates are falling and so is inflation. If rates continue to fall and remain low, you´ll get deflation”!

Australia Aug16_3

If only the RBA had continued to pay attention to NGDP!

The chart shows that the house price boom ended, without tears, more than 10 years ago.

Australia Aug16_4

One thought on “The Reserve Bank of Australia is becoming ‘conventional’

  1. how bad will things have to get before some central bank, somewhere, breaks away from this “interest rate policy is monetary policy” consensus. china?

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