The RBA's last two rate cuts didn't even touch the sides of the economy – but it's going to keep on slashing them regardless

It may come tumbling down but the RBA won’t stop. (Photo by Alexander Hassenstein, Getty Images)
  • The RBA has admitted its June and July rate cuts didn’t achieve much at all in its latest October meeting minutes.
  • Following the cuts, household spending didn’t pick up, the RBA noted, making the admission that its principal tool might not be so effective to get the economy going.
  • Despite that, the minutes clearly indicated the RBA would continue to cut as the economy weakens, with expectations high the next cut will come in February.

The Reserve Bank of Australia (RBA) is in one hell of a tricky position. It knows well enough that it can’t get the economy going by itself but it’s not going to wave the white flag either.

It admitted as much at its October meeting, the minutes of which were released on Tuesday, with board members conceding the economy hadn’t improved significantly in the months following its June and July cuts.

“[Board] members noted that there had not yet been evidence of a pick-up in household spending following the recent reductions in the cash rate and receipt of the tax offset payments, although they acknowledged that it may be too early to expect any signs of a pick-up,” it said.

That’s an effective failure for the RBA which has been endeavouring to get Australians employed, earning more and spending all at once. While there are a whole host of new jobs being created, they are more than being gobbled up by a record-high proportion of Australians looking for work. That, in turn, has kept wages stagnate and spending down, and the economy looking precarious accordingly.

In short, the RBA has managed to achieve none of its stated aims — but not through lack of trying. It has decided to cut rates in three of its last five meetings — its principal lever to achieve economic growth. The official cash rate sits now at 0.75%, its lowest level in Australia’s history.

But rather than stimulating the economy, there’s some suggestion that they’re scaring Australians instead.

The RBA certainly notes “the possibility that [cuts] might be less effective than past experience suggests.”

That’s not to mention the risk of inflating house prices as borrowing becomes cheaper, although the RBA believes the recent drop in prices, and reluctance among banks to lend limits the risk somewhat.

“Nonetheless, members assessed that close monitoring of this risk was warranted,” the RBA said.

That may also be offset by the fact that the banks are only passing on partial cuts, limiting the stimulus provided to both the housing market as well as the economy. It also may be enough to see the RBA continue cutting. It is after all expected to slash the interest rate to 0.5% by early next year.

But it’s running out of moves. The government has refused to spend, and the RBA itself is really only left with unconventional tools like negative interest rates and quantitative easing (QE) — both of which it is reluctant to use.

“At that point we take the view that lowering the cash rate below 0.5% would involve a suite of additional measures. The most likely candidates are forward guidance and some form of quantitative easing,” CBA senior economist Belinda Allen said in a note issued to Business Insider Australia.

“[But] what would reduce the need for unconventional monetary policy stimulus is conventional fiscal policy. There are some tentative signs of willingness to ease fiscal policy in the mid‑year budget review — due December.”

The government however has given no indication thus far it will do so, which leaves the RBA on the hook to Australian unemployment level.

“The Board would continue to monitor developments, including in the labour market, and was prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time,” the RBA said.

Without an uptick, however, in the economy, which looks like it will all but elude the central bank, it will have no choice. That’s why it cut in October, and that’s why it will no doubt cut again, despite it not working and despite the risks.

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