From the very well-sourced Peter Martin:
Don’t expect another cut in interest rates. It’s true that Reserve Bank governor Glenn Stevens is holding open the possibility of further cuts. It remains, he said last week, “on the table”. But further cuts are far less likely than they would have been, for three reasons also spelled out in last week’s speech.
One is that the Australian dollar has plunged to about where the Reserve Bank wants it. In the past Stevens has said it was “too high”, overvalued, “and not just by a few cents”.
…Another reason is his fear there will come a point when further cuts encourage dangerously reckless borrowing.
…And another reason – the most important – is that the bank is in the process of lowering its ambition. It is preparing to accept a more modest rate of economic growth than it was only months ago.
All very solid thinking. Except for one flaw. Glenn Stevens is not in control of either the economy or the business cycle. My advice to all of these RBA-obsessed observers is look at those first.
Captain Glenn has not wanted to cut rates for two years but he’s been forced to do it. As I wrote last year when he told us all that rates were at the bottom before launching more cuts:
Captain Glenn is like Kafka’s half-changed cockroach in The Metamorphosis, horrified at the economist he was and appalled at the economist he must become. Rate prognosticators would be best served ignoring him and watching the economy. Rates will fall, he’ll have no choice.
I could show you one hundred charts to make my point but you only really need one, the terms of trade:
The first half of the falls destroyed the mining investment boom and Budget outlook, forcing the RBA to cut rates 275bps and fire up a property bubble to prevent recession. As the second half of the historic reversion to mean transpires over the next two years, the Budget implodes again and household panic begins to rise as Chinese growth sinks, do you really think that the RBA will be able to sit on its hands as it mulls the academic implications of secular stagnation?
By the time this bust is done, Glenn Stevens will have metamorphosed into a full blown, six legged, black-shelled, mandible chomping roach from Hell.
