The RBA stands alone in trying to kick the economy back toward trend growth due to fiscal conservatism at a Federal and State government level.
That’s the message from Saul Eslake, BoA Merrill Lynch chief economist in Australia, who argues that the RBA efforts will increasingly be less effective and simply drive up asset prices rather than lift the economy.
But as the official interest rate declines to fresh record lows, we argue that the further easing of monetary policy risks being a triumph more of higher asset prices and housing debt than significantly improved activity. We expect that the upside to residential construction contributing to growth is relatively limited. By contrast, the upside to household leverage seems significant. This is in the context of the RBA previously arguing that it is not the level of interest rates that is the impediment to the business sector investing and employing more. Rather it is being restrained by a seemingly crippling lack of confidence.
Eslake says the RBA recognises the lack of traction from interest rate cuts but while this almost guarantees “that rates will have to go lower still in an effort to stimulate activity”, any stimulative effect will be minimal. Rather, Eslake says that a lower Aussie dollar will take time to pass through and benefits will go into business’s bottom lines, not economic activity.
“The real problem, as the RBA has highlighted, is the lack of confidence and risk appetite in the business sector. And lower rates are unlikely to assist with this,” Eslake said.
With the RBA just this month having downgraded its economic outlook and the Government under scrutiny, both for its leadership and economic credentials, the “confidence-enhancing narrative” that the RBA’s Governor spoke about last December is lacking.
So lower rates are coming. But they may not work.
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