Another good column from David Bassanese in the AFR today (excerpt only):
But we should not forget the case for gradualism – in that it best guarantees a relatively stable and less disruptive path for interest rates over time.
If there’s a modest chance that economic developments over the coming month would rule out the need for a further 25 basis point rate cut – as is usually the case – the Reserve Bank would naturally prefer to move incrementally. That would provide more stability for the economy than slashing rates by 50 basis points one month, only to reverse half the rate cut the following month or two.
What could change? One upside risk is a further strong rebound in employment – after the solid 44,000 gain in March. Indeed, what’s been lost amid the tales of economic woe of late is a solid rebound in ANZ Banking Group job advertisements this year. The National Australia Bank index of labour hiring intentions has also stabilised in recent months at close to its long-run average.
All this suggests the labour market may have already moved beyond its worst point, and the still low unemployment rate won’t go much higher.
By the same token, if the Reserve Bank board feels it’s virtually certain to cut interest rates a further 25 basis points in June, it might conclude – why wait?
Even in this case, however, it could be argued that a larger than usual rate cut might have a perverse impact on confidence – implying conditions are worse than they really are.
It would also look more like an admission of error by the Reserve Bank and make it less able to reward the federal government with a post-budget rate cut in June.
Most fundamentally, however, a larger than normal rate adjustment usually follows larger than normal changes to the economic outlook – such as a sudden implosion in global financial markets.
This has not been the case.
Indeed, all that’s happened in recent months is that we’ve discovered the two rate cuts late last year have as yet not done much to lift concerns over household finances or improve dwelling activity.
The non-mining areas of the economy remain fairly lacklustre. Economic growth was also weaker last year due to a slower than anticipated post-flood recovery in mining exports.
Yet we’re far from facing crisis conditions. According to the NAB business survey, for example, overall business conditions have recovered modestly in recent months, bringing them back into line with their long-run average. And it’s premature to argue the mining investment boom will have little stimulatory impact when there’s still so much more to come
