The RBA cut rates to a modern day low of 1.75% last week and with its quarterly Statement on Monetary Policy Friday, materially downgraded its inflation expectations which signalled that rates are likely to go lower.
Markets received the message loud and clear and are betting on a second rate cut, pushing interest rates to levels that suggest a third cut is a strong chance.
But it’s all an exercise in futility, according to former RBA governor Bernie Fraser.
Fraser, RBA governor between 1989 and 1996 and the man credited with engineering the RBA’s 2-3% inflation target, told the AFR he is not “in the slightest” bit worried about letting inflation slip below the bottom of this target range for inflation.
That is interesting from the governor who cut rates by 0.5% on July 31, 1996 when inflation was above the target band because, in the words of his accompanying statement, “the economy has the capacity to grow a little faster than at present without threatening this objective”.
No doubt current governor Glenn Stevens and soon-to-be governor Phil Lowe and the RBA board would argue that with inflation below the target band, the economy has this very capacity to grow without threatening an inflation break out.
Indeed, last week’s quarterly Statement of Monetary Policy suggested it is only with rate cuts that the economy will actually grow at a reasonable rate in the current environment.
Fraser’s objection is clearly based on a different view of the outlook for inflation from that held by the current RBA management and board. He clearly thinks the move below the bottom of the band is only temporary.
“There were periods early on where it was significantly above 3 per cent, I think the same flexibility should apply to it undershooting the bottom of the range,” he said.
To reiterate this point, Fraser said there had only been one quarter of deflation and added, “I wouldn’t myself have been concerned about a short period of under 2 per cent inflation – not in the slightest”.
But Fraser isn’t entirely out of step with Stevens, the RBA board, or central bankers globally.
Fraser said: “I don’t see myself as fiddling with monetary policy to deal with the deflation problem. I don’t see monetary policy as solving the problem with zero, or practically zero, interest rates or quantitative easing. It can’t get things moving.”
Rather like the message Stevens delivered in New York recently, Fraser wants the government to do more to support the economy.
“The Reserve Bank should be talking to the government and saying there is not much more we can do on monetary policy, that this is a classic situation for being more active on fiscal policy. Australia shouldn’t worry too much about debt and deficit at this stage. We need some growth,” he said.
On that, Fraser, Stevens, the RBA and private sector economists are likely to find an accord.
You can read the original story at the AFR here.
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