Yahoo Finance 
How RBA's 'serious' errors are hitting your pocket
Australia’s economy is being held back by a serious policy error from the Reserve Bank of Australia.
That error, in keeping interest rates too high for too long, is showing up in the ongoing low inflation rate, which for two years now has been outside the RBA target range of 2 to 3 per cent. This week’s data confirmed that inflation is likely to fall further over the next year which, without near-term policy action, will only compound the RBA’s mistake.
That error from the RBA has ensured the rate of economic growth has been well below par for many years. Annual GDP growth has been stuck around 2 to 2.5 per cent, at best, for the last four years which has meant underemployment and unemployment have remained well above the levels normally associated with a fully employed economy. The economy would be more likely to grow at a 2.75 to 3 per cent pace if interest rates were materially lower.
That RBA error has meant that wages growth, which are such a critical driver of household incomes and therefore spending power, is hovering around record lows between 1.5 to 2 per cent. This has ensured there has been an unwelcome mix of weak retail spending, falling household savings and an ongoing reliance on debt to fund even basic consumption spending.
This is adding to risks of financial instability and with it, an economic bust.
That error on interest rates has also meant the Australian dollar is stronger than it need be with foreign investors buying our currency, in part, because of the interest rates on offer. This overvalued level for the Australian dollar has crimped export earnings and has allowed importers to gain a foothold into the Australian economy at the cost of local producers.
That error can be rectified with a near term interest rate cut. Indeed, the interest rate cut or two that should have been delivered 6 to 12 months ago, can be delivered in coming months if the RBA recalibrates its forecasts based on the fact of ongoing low inflation, tepid growth and ongoing slack in the labour market.
Lower interest rates, perhaps taking the official cash rate to 0.75 or 1.0 per cent, would help underpin the more positive tone emerging in the outlook for business investment. Lower interest rates implemented in concert with a further tightening in lending criteria for investment housing, would free up cash flows for mortgage holders which would help them to scale back their debt levels by maintaining the dollar level of repayments without sacrificing consumption.
And the lower interest rate settings would help kick the Australian dollar lower, which would be a major boost to exporters and firms competing with imports.
Most plainly, lower interest rates would underpin an acceleration in bottom line GDP growth, would help lower unemployment and would see wages growth and inflation pick up.
Other central banks, when faced with inflation below target, high unemployment and sluggish economic conditions cut interest rates to near zero.
This stimulatory policy has seen those countries out-perform Australia in recent years with high per capita GDP growth, lower unemployment and higher wages than Australia and a more buoyant outlook for business investment.
The fact that Australia is now lagging on many of these benchmarks is due to the policy mistakes of the RBA over recent years. The sooner it realizes the error of its way and works to fix these mistakes, the better for growth, unemployment, wages and inflation.
