Phew, I thought I was going utterly loco for a while there. Thankfully, The Australian's David Uren has come to my rescue. It turns out that all those folks claiming that the December rate cut was an obvious, "slam dunk" decision were very wrong (ping my old sparring partner you-know-who). My sense that it was a "line-ball", judgement call with persuasive arguments for and against was apparently on the mark. It also looks like some inside the RBA agree with me that the case for both a December cut, and now an additional February cut, is substantially weaker today than when the RBA last met in December. What is interesting is that they want the world to know this--and have communicated it via David Uren. Frankly, the McCrann line of logic was doing my head in. Anyhow, here is the other side of the story from Uren today:
"THE two interest rate cuts late last year were keenly debated at the Reserve Bank, as some senior staff argued the bank was jumping at shadows, with no certainty that the dark visions for Europe that drove the decision would be borne out.
When the bank's monetary policy discussion group, which cements the staff recommendation to the board, meets on Wednesday, the losers at the last two meetings have a good chance of coming out on top. It will be harder for the bank to justify a further cut, notwithstanding the nearly unanimous verdict of market economists and financial markets that it will do just that.
At each of the last two meetings, senior RBA staff have argued that the central forecasts for neither the Australian economy nor the major world economies justified a change in the bank's long-standing view that the massive resource investment boom would stretch the economy's capacity and increase inflationary risk.
Australia's trading partners, including China, were continuing to record strong growth. Although it was easy to paint scenarios for Europe that would resemble the 2008 Lehmans collapse, this had not yet happened and the bank would have time to respond forcefully when and if it did.
The prevailing argument, endorsed by governor Glenn Stevens, was that the downside risks were sufficiently serious to warrant a response and that downward revisions to Australia's inflation by the Australian Bureau of Statistics meant the upper limit of the bank's 2-3 per cent target range was not in danger of being breached. In these circumstances, the bank could justify shifting the official interest rate from a level calculated to restrict economic activity to one that was "more neutral". The official rate was brought down in two steps from 4.75 per cent to 4.25 per cent.
Senior bank officials now argue that further rate cuts would shift monetary policy into stimulatory territory. An extra burden of proof would be required...
When the RBA cut rates in December, senior bank officials expected only half the cut to be passed on to mortgage holders and were surprised that the government's hectoring resulted in full pass-through.
Real rates are possibly a bit lower than the board intended them to be, although the rise in the dollar has contributed to a modest tightening in monetary conditions since the end of the year.
Traces of the disagreement at the bank's top level have come through in the board meeting minutes, with the presentation of both sides of the argument "on the one hand" and "on the other". In December, it was agreed there was "no strong need to cut interest rates". There is less need now."
