Chief economist update: Zero here we go

A stitch in time saves nine.

If only the Reserve Bank of Australia (RBA) adhered to this age-old proverb. But alas, by insisting on keeping the official cash rate at 1.5% for longer (from August 2016 to May 2019) than the dictates of global and domestic macro-economic fundamentals, it finds itself doing even more stitching.

If only the RBA applied the opposite of what central banks around the world were proclaiming, "We need to raise interest rates now to avoid lifting rates by more in the future" during the good times.

On 1 October 2019, the RBA announced its third interest rate reduction in five months - 25 basis points each in June and July and October - taking the official cash rate to another record low of 0.75%.

Financial Standard had been arguing for an RBA rate cut since June 2018. The time when "experts" were still predicting one, maybe two, RBA rate hikes going forward ... and the RBA was still insisting that the next move in interest rates is likely to be up rather than down and about the same time three of the 10 highly-qualified and esteemed experts at the Centre for Applied Macroeconomic Analysis (CAMA) that currently sits as the RBA Shadow Board called on the central bank to raise interest rates.

In April this year, II wrote the case for why there's no other option for the Reserve Bank of Australia (RBA) but to cut interest rates soon and twice.

But enough of shoulda, woulda, coulda. It's all water under the bridge. The road ahead is what matters more.

As RBA Governor Lowe explained, "The Board took the decision to lower interest rates further today to support employment and income growth and to provide greater confidence that inflation will be consistent with the medium-term target...and is 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."

Would the RBA's recent cut (and further rate reductions to zero or negative even) be sufficient to re-start the Australian economy?

I'm afraid not.

Global and domestic uncertainties - and expectations for even lower interest rates - would only encourage businesses and consumers to defer/delay their spending plans which, in turn, lead to a self-fulfilling prophecy of lower interest rates and slower growth.

Why borrow and spend now when borrowing rates will be cheaper in the very near future, and in the case of negative interest rates might even be paid to borrow?

Further RBA interest rate reductions would only lead to unintended consequences and undesired effects, that is raising greater concerns over the economic outlook.

It's time fiscal policy lends a helping hand by ditching the government's obsession in getting a budget surplus in print.

To paraphrase the bible, what good does it profit Australia if it gains a budget surplus but sinks the economy into a recession?

Read more: Reserve Bank of AustraliaCentre for Applied Macroeconomic AnalysisPhilip Lowe
Link to something tmJtOLZR