Rate cuts could be on hold until next year

Ross Greenwood speaks to CBA chief economist Michael Blythe who says not to expect another rate cut until next year after the Reserve Bank indicated low rates may not be having the desired effect on the economy.

Ross Greenwood: Great day for your company. You’re on Money News, going right around Australia. You know the Reserve Bank is likely to make an interest rate cut tomorrow. That’s at least the betting of money markets right now. Indeed the vast majority of market economists, says 25 of them surveyed by Bloomberg that say exactly that. Interest rate cut from one percent, already emergency lows, to just .075 of a percent. The first time that there’s been a zero in front of the official cash rate from the reserve bank in history.

Now bear in mind, there’s already been two rate cuts this year, June and July, but it seems notwithstanding the tentative increases in house prices that have happened in Sydney and Melbourne that the reserve bank is continuing to cut. It doesn’t normally happen when house prices go up. Normally, interest rates should have a tendency that they might rise as well. So something else is going on. To help us solve it, let’s go to the Chief Economist at the Commonwealth Bank, Michael Blythe. He’s online right now. Michael, many thanks for your time.

Interview with: Michael Blythe, CBA, Chief Economist

Michael Blythe: Thank you.

Ross Greenwood: Okay, so talk me through this. There are other signs that the interest rate cuts and the tax cuts handed out by government post June 30 this year are started to have a positive impact on Melbourne and Sydney house prices in particular. That was one justification for having cut interest rates. What is it that the Reserve Bank is saying? Why is it that they want to continue cut these rates?

Michael Blythe: Well, what we’ve heard from the Governor in recent times is that the economy’s proved to be a little bit weaker than they were expecting to see. The unemployment rate been slowly creeping back up against their backdrop and so they’re like to apply some more interest rate medicine to try to stop that from happening and to push the unemployment rate toward that 4.5% figure that they regard as full employment for Australia these days.

Ross Greenwood: Okay, but part of the problem is, as we’ve expressed on this program in the past, is that because of the cost of living pressure on families, and we know one of the problems is household debt is approaching two times income, which is historically high anywhere around the world, including in Australia that more families literally going out and either getting a second job, a third job, you know driving Uber, Uber eats, delivery, whatever it might be, or indeed many women and older Australians going back into the workforce to find income because they recognize if they don’t have the income their lives become very, very difficult.

Michael Blythe: Yes, well that’s true and it’s one of the reasons that it’s so hard to get the unemployment rate down. A lot of new people entering into the labor force for lots of reasons as you say. We’ve got to create even more jobs to absorb them over and above for people who entered the labor force each month normally.

Ross Greenwood: So it just seems counterintuitive to me to be cutting interest rates at a time when house prices are rising, and there are signs already that the actions taken by government and the central bank are working. So what are the things that are out there? I mean, I know that business is sluggish, but it didn’t look that way in the lastest profit reporting season. The stock market is certainly not showing or expressing any concerns about what taking place. So what it is the reserve bank is trying to do here? I think there’s a little confusion as to what its motives are right now.

Michael Blythe: Well, even I’m not sure that rate cuts are helping in the current environment. It doesn’t appear that rates are so high that they’re stopping people from borrowing. In fact, what we see happening is most people are keeping their home loans for repayment unchanged. So they’re not freeing up any extra spending power but are just paying off those loans a bit faster. The Aussie dollar has moved a little bit lower and that should help. But it’s not the big drops would really change the direction of the economy. And, of course, we’ve seen consumer confidence fall, since Reserve Bank was cutting rates. Outside of the housing market, rate cuts don’t seem to be working too well. And if you are worried about the consumer and households then the most effective policy response right now is these tax cuts that are running- that are filtering their way into people’s accounts.

Ross Greenwood: Between you and me, do you think there is something of a standoff between the Reserve Bank and the federal government, right now? The government is determined to deliver surpluses. It’s not really heeding the call that it needs to bring forward tax cuts or additional spending to try to stimulate the economy and take pressure off the Reserve Bank. Do you believe that this is, though they put out very friendly messages but are they very supportive of each other publically? Do you think that behind the scenes that there is something of a pressure between the two given the fact that the government is expecting the Reserve Bank to do a lot of the heavy lifting?

Michael Blythe: Look, I think that’s right. We’re pushing interest rates ever close to zero and trying to run a budget surplus at the same time. Now from an economist’s perspective, these are kind of contradictory policy settings, really not necessarily giving you the result you want to see. Too much pressure on the RBA to do the heavy lifting, as you say, without necessarily getting the results that you want to see.

Ross Greenwood: Okay, so then take me to the global situation. How much is the Reserve Bank simply trying to copy what other countries are doing? In September, for example, there were 18 countries around the world that cut interest rates. Amongst them, the United States, Europe, China, Brazil, Mexico, Egypt, the Philippines, Indonesia, China I mentioned. Then on top of that, you’ve got a situation where it suggests that because others are cutting interest rates that maybe Australia needs to do the same thing. Do you buy that or not?

Micheal: I think the Governors are making it pretty clear that the rest of the world is cutting rates that it’s going to be hard for him to resist. To be fair, the reason all these central banks pushing through those rate cuts is that they’re worried about the global backdrop and the impact of the trade war and other uncertainties like Brexit that are playing out right now. So they got a global perspective. You can understand why central banks are worried and why they’re responding to that. But I think outside of Australia, it’s much the same story here. Most central banks would like to see a lot more of the work being done by fiscal policy, a bit of infrastructure spending or tax cuts.

Ross Greenwood: But the problem is if we have interest rates at three-quarters of a percent or half a percent that if something were to happen, really catastrophic, then that would have a significant impact on Australia. There’s no real room left in terms of Reserve Bank try to help government, apart from say Quantitative Easing, which would mean taking on significant amount of debt to make certain there’s enough liquidity out there in Australia’s economy.

Michael Blythe: Yes, that’s right, we’re certainly running out of interest rate bullets at least, so there are all these unconventional measures that central banks have tried elsewhere and our own bank is also being talking about of course. There are other policy leaders there. But I don’t necessarily think they’ll deliver the result you want to see. In the end, monetary policy can’t deliver you sustainable growth. It helps during downturns but it doesn’t give you that sort of longer-term basis of growth. That’s where things like infrastructure and income tax cuts are much better policy path to fund.

Ross Greenwood: Well, Mark Blythe has given us a pretty good understanding of what the Reserve Bank is considering with that interest rate decision at 2:30 tomorrow, of course, Australian eastern standard time. We’ll bring you all the details tomorrow night. So with that, I just wonder which way you would go. So give us a call at 131873. Chief Economist at the Commonwealth Bank, Michael Blye. As always, we appreciate your time.

Michael Blythe: Thanks so much, Ross.

Image source: 2GB

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