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RBA makes the wrong decision

Last month, the Reserve Bank of Australia (RBA) held its policy rate unchanged at 4.5 per cent contrary to what the bank economists expected. I said at the time in this blog – RBA confounds the market economists – but that’s easy – that RBA made the correct decision. It reflected the fact that the world economy is still in trouble as the fiscal austerity in various places starts to bite. It also reflected the fact that the trends in the local economy are far from clear and solid evidence is available to suggest that despite the boom in primary commodity prices (from Asia) our economy is still fragile. The labour market has considerable slack (12.5 per cent underutilisation rates) and housing and sales are flat or in decline. Most importantly (for the RBA) inflation is moderating in Australia. Nothing much has changed in the meantime and I was expecting (along with all my bank economist friends) for the RBA to hold its line again. Yesterday, the RBA confounded us all and pushed rates up by 25 basis points. But even more stark was the decision by the formerly public bank (privatised by the neo-liberals) – the CBA – to push its standard mortgage rate up by 45 basis points after announcing a huge and increasing profit earlier in the week. The RBA made the wrong decision yesterday.

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RBA confounds the market economists – but that’s easy

The Reserve Bank of Australia (RBA) announced today that its policy rate would stay unchanged at 4.5 per cent. It means that the policy rates have been on hold since May after the tightening cycle began in October 2009 and led to 6 rises. The RBA has clearly been looking out the window. It is seeing the Eurozone deteriorating further as the fiscal austerity bites. The UK is now slowing and likely to head back into recession courtesy of the vandalism of its government which thinks it has run out of money. And the US economy is slowing again as its dysfunctional political system is demonstrating it is incapable of maintaining spending growth at levels sufficient to reduce its obscenely high unemployment. Deflation is the threat now. In terms of the local economy there are conflicting tendencies. Private spending remains flat and the fiscal stimulus is waning. Parts of the economy are buoyant as a result of the boom in primary commodity demand (from Asia). The labour market is also still fairly fragile with 13 per cent of our labour resources idle (unemployed or underemployed). Further, inflation is stable in Australia. So it is hardly time to be increasing interest rates. But try telling that to the bank economists who mostly predicted a rise today. They were wrong. They often are. That is no surprise given the narrow way they think about the economy. The RBA made the correct decision today.

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RBA finally decides to stop sabotaging growth

The Reserve Bank of Australia (RBA) announced today that its policy rate would stay unchanged at 4.5 per cent. This brings to an end (for now) the tightening cycle which began in October 2009 and has seen 6 rises since that time. The scene is clear. The Eurozone is deteriorating further into another crisis with social unrest coming to the fore. In terms of the local economy all the talk of an impending boom is waning. The proximate indicators suggest that economic growth in Australia is very weak (across many indicators) and it is hardly the time to be further increasing interest rates. Today’s decision also put into stark relief the calls from the OECD last week to impose a very significant monetary tightening to accompanying fiscal austerity measures. The RBA is clearly not following that nonsensical logic.

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RBA decision exemplifies a deep macro policy imbalance

Today, the Reserve Bank of Australia (RBA) announced that its policy rate will rise by 0.25 per cent to 4.5 per cent. This will push mortgage rates well above 7 per cent. Every time the RBA lifts its rate by 0.25 per cent, the average mortgage holder is $A46 a month worse off. Since this tightening cycle began in October 2009 there have been 6 such rises which makes the average mortgage holder $A276 per month worse off than they were in September 2009. Most will be even worse off given that the commercial banks have been gouging larger proportional increases over this period. The decision also comes in the same week that the Final Report of the Australia’s Future Tax System Review was released. The Government has rejected certain recommendations from that Review which were aimed at providing a fiscal redress to the tightening housing market and by implication reducing the need for monetary policy tightening. What this tells me is that the neo-liberal economic policy dominance that pushed the world into the current crisis remains firmly in place. The result will be entrenched labour underutilisation, rising housing stress and ultimately another economic crisis. Maybe the next crisis will see the demise of this nonsensical approach to macroeconomic policy making.

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Rates go up again down here

This time last month I was trying out the mobile office concept up the coast (see blog). The experiment was a success but the blog I wrote that day coincided with the decision of the Reserve Bank (RBA) to hike short-term interest rates again, which I considered to be a mistake. Exactly, one month later, the RBA is at it again however I am in Newcastle and there is no surf! The RBA announced today, quite predictably, that the policy rate will rise by 0.25 per cent which will push mortgage rates above 7 per cent. Our greedy private banks get another free ride out of this and the decision confirms that the crisis has not really changed the neo-liberal economic policy dominance. Inflation targeting which uses labour underutilisation as a policy weapon and fiscal surpluses which further drag the economy down – are well and truly entrenched. Spare the thought.

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