It is nice to be vindicated by the hard empirical data. House prices are not slowly melting, or plummeting (they've been rising of late). The economy is not growing below-trend (it's been expanding at an above-trend pace). The retail market is not experiencing recession. In fact, consumer spending is running at an above-trend pace too. Would the RBA have cut by 125 basis points between November and June based on what it knows today? Extremely unlikely...
Perhaps we would have got 50 basis points to get the cash rate back to neutral. Today we have a prominent economic dove--somebody who previously argued that the economy was significantly weaker than the RBA presumed (as did some rates strategists)--swivelling 180 degrees to question whether the latest batch of data imply the RBA went too far.
What we know with certainty is this: probably around 75 basis points of the RBA rate cuts were knee-jerk "insurance" decisions not justified on domestic economy grounds. The central bank has claimed historically that it is not meant to be in the business of doling out insurance to vested interests (eg, the retailers and manufacturers that sit on its board) or to skittish financial markets baying for bail-outs. But it nevertheless complied, which I think is regrettable. If I were on the RBA's board, I would have probably cut once in November and once in May. Here is my friend David Uren:
THE Reserve Bank's rate cuts in May and June now appear premature, with retail sales leaping ahead at their best annual rate in three years and house prices rising as investors return to the market. The cuts were intended to erect a defensive shield against a hostile world. The Reserve Bank believed the economy was growing at below its long-term trend rate of about 3 per cent when it made the decision to cut rates in May. When it cut again in June, it forecast that global uncertainty would bring increasing consumer and business caution.
It was blindsided by the March quarter national accounts, released the day after its June board meeting, showing the economy was ripping along at an annual rate of 4.3 per cent, with household consumption leading the growth. Yesterday's retail sales figures, along with good exports and the continuing build-up of resource investment, suggest that the economic momentum has carried into the June quarter.
Retail sales are growing rapidly in all states, with the national total well above the long-term average. The growth is not an aberration and is being recorded by the nation's largest retailers.
Other signs of unforeseen strength in the economy include rising house prices and strong motor vehicle sales. The Reserve Bank's cuts have given it a push, with Westpac calculating they have put an additional $1.2 billion into consumer pockets. The carbon tax compensation and the bonus for parents of school children have added a further $1.9bn...
