Australia markets closed

    +2.00 (+0.03%)
  • ASX 200

    -3.60 (-0.05%)

    -0.0029 (-0.37%)
  • OIL

    -0.26 (-0.44%)
  • GOLD

    -14.10 (-0.80%)

    +1,028.32 (+1.33%)
  • CMC Crypto 200

    +8.34 (+0.68%)

    -0.0018 (-0.29%)

    -0.0010 (-0.10%)
  • NZX 50

    -58.25 (-0.46%)

    +86.55 (+0.63%)
  • FTSE

    -26.47 (-0.38%)
  • Dow Jones

    +297.03 (+0.89%)
  • DAX

    +31.48 (+0.21%)
  • Hang Seng

    -309.27 (-1.07%)
  • NIKKEI 225

    +59.08 (+0.20%)

OPINION | The RBA's policy: 'Do nothing and hope for the best'

Stephen Koukoulas
RBA governor Phil Lowe. Image: Getty
RBA governor Phil Lowe. Image: Getty

Despite a raft of disappointing economic news, the Reserve Bank of Australia did nothing last week to help stimulate the economy.

It is on a ‘watch and not-act’ alert for the economy, failing to fully use its policy tools to help ensure, lock in and guarantee a stronger economy into 2020 and 2021.

On Tuesday, official interest rates were left on hold at 0.75 per cent for a second month, even though the run of economic news points to, in the words of the Governor Phillip Lowe, “risks still tilted to the downside”.

The recent news on the economy, including the September quarter GDP results, are disappointing.

Until about a month ago, there were signs that the economy was bottoming out and that 2019 would finish with the economy poised to register a decent, solid expansion into the new year.

Such were these hopes that a further interest rate cut was no longer fully priced in to the futures market and the Australian dollar was moving higher.

The Reserve Bank of Australia forecasts from a month ago, in its Statement on Monetary Policy, presented a reasonably upbeat outlook for the economy with GDP growth forecast to pick up stream, rising 2.75 per cent in 2020 and a decent 3 per cent in 2021.

After all, it had cut official interest rates 3 times in 6 months, there has been some small tax cuts feeding into people’s bank accounts, the rise in house prices and stocks were feeding a decent rebound in wealth and the global economy was growing at a steady pace.

Fast forward a month and the data flow has been overwhelmingly on the downside with the only areas of true strength being house prices, exports and segments of government demand.

The areas which have shown the economy to be in a little trouble in the past month include:

  • Falling retail trade.

  • Falling building approvals.

  • Falling employment.

  • Rising unemployment.

  • Rising underemployment.

  • Falling business investment.

  • Falling job advertisements.

  • Falling car sales.

  • Falling wages growth.

  • Moribund GDP growth entrenched under 2 per cent.

GDP growth at 1.7 per cent in the year to the September quarter is about half of what would be ideal given how much spare capacity there is in the economy and the task ahead for reducing unemployment, boosting wages growth and lifting inflation back to the target range.

The RBA could help fix this through its own actions.

Instead, it has chosen to do nothing, and quite oddly entered the political field effectively telling the government how it should spend and tax, areas well outside the remit of the RBA.

While some fiscal stimulus could well be desirable, the RBA does not understand that it is the government’s political wish to purse a budget surplus, for better or worse.

Rather than complain about this political and policy reality, the RBA should incorporate this fiscal tightness into its forecasts and adjust monetary policy to get private sector demand back on track.

It appears that the RBA is floundering around, looking for others to blame for its failure to reflate the economy.

The list of disappointing economic news that casts doubt not only about the current health of the economy, but prospects into 2020.

For now, the odds of an acceleration on GDP growth towards 3 per cent in 2020 have widened.

It is too early to rule it out, of course, especially with rising house prices adding to wealth and enhancing the prospects of a pick-up in dwelling construction from the middle of 2020.

But to get to 3 per cent GDP growth, the news needs to improve within the next few months. Consumer sentiment and spending will need to be strong over the festive season and housing will need to remain positive.

In the meantime, it is two long months until the RBA next meets in February next year. It is hoping that the economic news will be stronger in this time. If these hopes are dashed and the economic data remains disappointing, it will only have itself to blame.

Make your money work with Yahoo Finance’s daily newsletter. Sign up here and stay on top of the latest money, news and tech news.