Rather than merely acknowledging that the next move in interest rates is as likely to be down as up, I think the Reserve Bank should get on with cutting them. But not for the reason you may imagine.
There are plenty of people – many of them in the media – silly enough to believe a fall in interest rates is always good, and a rise always bad. They have a mortgage-centred view of the universe.
They forget that lower rates are bad news for people living off their savings – or saving for a home deposit.
More particularly, they forget that central banks use interest rates to keep the economy on an even keel. Judged the conventional way, central banks cut interest rates when they judge the economy to be weak or weakening.
So, even for those with mortgages, a cut in rates is no reason to celebrate. They’ll be paying less interest, sure, but only because, in the econocrats’ judgement, there’s now a greater risk they’ll lose their job, be put on a short working week, or go for year or two without a pay rise.
Is that what you’re hoping for? I’m not. Nor do I think it’s our certain fate. The biggest risk we face is talking ourselves into a downturn – for no better reason than it would be something new to talk about.
Telling ourselves that a fall in house prices – something we’ve experienced many times before and lived to tell the tale – is the start of an avalanche.
Or, when Reserve Bank governor Dr Philip Lowe moves from saying the next move in rates is up, to saying the chances are evenly balanced between up and down, leaping to the conclusion he’s really saying a cut is imminent.
It isn’t. It isn’t because, as he made plain in a speech on Wednesday – and reiterated in the statement on monetary policy on Friday – he remains confident the economy has slowed a bit, but no worse. His revised forecast is for the economy to grow by an above-trend 3 per cent this year.
And a rate cut isn’t imminent because he said it wasn’t. “[The board] does not see a strong case for a near-term change in the cash rate. We are in the position of being able to maintain the current policy setting while we assess the shifts in the global economy and the strength of household spending.”
He also said that “what we are seeing looks to be a manageable adjustment in the housing market”.
So a rate cut isn’t imminent. According to Lowe, a cut would require “a sustained increase in the unemployment rate”. Which, judged by conventional standards, is good news. It means he believes the economy will continue plugging on.
But my point is different. Lowe is pursuing a conventional, business-as-usual approach to managing the economy because he assumes nothing fundamental has changed.
His conventional thinking is that it’s weak wage growth that’s driving the economy’s relative stagnation. It hasn’t occurred to him it’s the other way round: the economy’s stagnation is the cause of weak wage growth.
I think it’s clear the phenomenon of “secular (that is, long-lasting) stagnation” – exceptionally low inflation, low wage growth, low real interest rates, low business investment, low productivity improvement and low economic growth – applies to our economy as well as to the United States and the other advanced economies.
Every symptom on that list applies to us (bar the long-past mining investment boom). And stagnation isn’t a bad way to describe our position, where growth over the 10 financial years since the global financial crisis has averaged less than 2.6 per cent a year and only one year (2011-12) has been above trend.
One thing that’s become clear in America and other advanced economies is that secular stagnation – the causes of which economists are still debating – has caused conventional estimates of the NAIRU (“non-accelerating-inflation rate of unemployment” – the lowest rate to which unemployment can fall before wage and price inflation begin to worsen) to be far too high.
In those countries, unemployment has fallen well below where the NAIRU (sounds a bit like the island) was thought to be, without any sign of price inflation or excessive wage growth.
The same can be said of us. The Reserve estimates our NAIRU to be “about 5 per cent”. Our actual unemployment rate has been at 5 per cent or so for some months, while the latest reading for underlying inflation is 1.75 per cent and for the wage price index is 2.2 per cent.
So, we’re at the supposed NAIRU without the slightest sign of inflation pressure. Indeed, underlying inflation has been below the 2 to 3 per cent target range since the end of 2015, and Lowe is forecasting it won’t get up into the target range until the end of next year.
This suggests that, in our newly stagnant world, the true NAIRU is a lot lower: 4.5 per cent, maybe 4 per cent. And since, as Lowe reminds us, the RBA’s objectives include “delivering on full employment”, he should be trying harder to get unemployment down to the true NAIRU.
How? By using the one instrument available to him: cutting interest rates to loosen a monetary policy that’s tighter than it needs to be.
Until recently, Lowe’s best reason for not lowering rates was a desire to avoid adding fuel to the boom in house prices (“asset-price inflation”). But now that constraint has lifted, there’s no reason to hesitate.
You could argue that, with households already so loaded with debt, a rate cut may not do much to boost consumer spending. But it probably would lower the dollar, which would improve our industries’ price competitiveness internationally, encouraging them to hire more workers. We’ve got little to lose.
