“Rate cuts ‘holding back’ the economy”

The main story in the Business Section of The Australian today with the heading in the paper found above. Online, the headline reads: Rate cuts eroding confidence, bank CEOs warn. They can see it, but unfortunately with modern economics such a backwater of stupidity they cannot explain it.

Commonwealth Bank boss Matt Comyn and his Westpac counterpart Brian Hartzer told a parliamentary committee they were positive about some areas of the economy, such as unemployment closing in on a decade low and a strong export sector, but business investment and wage growth were stubbornly weak.

“Our view is that each subsequent interest rate cut in relatively quick succession has probably dented some level of consumer and business confidence,” CBA’s Mr Comyn said.

“I certainly understand the rationale behind the Reserve Bank’s moves — low inflation, low income growth and lower confidence — and changes in monetary policy stabilise some aspects of the economic picture.

“But our view is that further rate cuts will not lead to a pick-up in economic activity.”

The conclusion is right out of a classical economics text. The reasoning from these bankers is a little loose but it is what they can see right before their eyes. And then, to add to the stupidity, we have the very next story to depress us further: ‘Unconventional’ policy looms as RBA cuts inflation forecasts.

Total incompetence but it is what they believe. That they also think that inflation is under control is even more bizarre. I don’t know where they do their measuring, but it’s not in any of the places I go to buy things. Inflation seems to be ripping along. I guess these public servants have no idea about what is really going on anywhere, other than in the statistics they misread that compensates for their inability to get the economy to grow.

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15 Responses to “Rate cuts ‘holding back’ the economy”

  1. Chris

    Compare the inflation ‘basket’ with the basket in 1975…
    Now it basically excludes food and fuel and …

  2. Chris

    Sorri I should have called it the CPI basket.

  3. RobK

    I have long thought it optimistic thinking a few basis points can turn a good investment into a bad one, or vice versa. That said, I’ve shifted some of my term deposits into my son’s off-set mortgage account as a loan.

  4. Dr Fred Lenin

    RobK. ‘I did a similar thing ,I was getting nothing much from term deposits so I paid out my daughters mortgage retaining some funds in term deposit ,she would get the money anyway one day ,and why should she pay interest to the banks . I may be wrong but I feel low rates discourage investment ,and investment creates jobs and wealth .

  5. stackja

    Is the Treasury Building, Parkes ACT, an ivory tower?

  6. stackja

    Higher taxes discourage the “animal spirits” of entrepreneurship. When tax rates are raised, taxpayers are encouraged to shift, hide and underreport income. Taxpayers divert their effort from pro-growth productive investments to seeking tax shelters, tax havens and tax exempt investments. This behavior tends to dampen economic growth and job creation.

    — W. Kurt Hauser

  7. I_am_not_a_robot

    Gross fixed capital formation has fallen since 2013 according to Trading Economics, the longest fall in the past 60 years.
    GFCF “… shows something about how much of the new value added in the economy is invested rather than consumed …
    … fluctuations in this indicator are often considered to show something about future business activity, business confidence and the pattern of economic growth … in times of economic uncertainty or recession, typically business investment in fixed assets will be reduced, since it ties up additional capital for a longer interval of time, with a risk that it will not pay itself off …”.
    (Wiki).
    Labour productivity increase has also stalled for the past three years.
    No wonder the stock market has yet to recover to the Oct ’07 peak and the currency is at its lowest since Apr ’09.

  8. MatrixTransform

    I’ve shifted some of my term deposits into my son’s off-set mortgage account as a loan.

    very nice … gives me an idea

  9. Electricity prices in most states of USA are less than half here. USA is going forward Oz is going backwards. None of the pollies understand costs and supply

  10. Squirrel

    It’s a pity that so much of what passes for the Australian economy now turns on real estate prices.

    The banks (and their fellow travellers in the commentariat) have been cheering on ever lower interest rates for years, and now it has bitten them on their backsides – that spectacle, and the belated Damascene conversion, is providing a little light relief in what are otherwise grim times.

    The federal government is still playing the lower rates game, but sooner rather than later, they will regret it, too.

  11. John A

    ‘Unconventional’ policy looms as RBA cuts inflation forecasts.

    If the RBA ma(n)darins had any sense the headline would read:

    RBA very bullish about the nation’s future as it cuts inflation forecasts.

  12. Tel

    I think it’s more of a relative thing (yup, everything is relative) in as much as almost all of history, the Australian rates are lower than US rates and I think it’s understood that the USA is a bigger and more stable economy. That fits the standard risk/reward profile:
    * Invest in the USA and get lower returns but also lower risk.
    * Invest in Australia and take a slightly higher risk for a bit better return.

    So that’s all nice and sweet and well understood until the USA is raising rates and the AU rates are falling and then we get the crossing point AU rates go below USA. Message telegraphed here? Australian economy has become the sick man and the US is hotting up. International investment dollar does a runner and jumps off the sinking ship (plague ship if you want to run with the mixed metaphor).

    Personally I think there’s a realistic chance that Yellen was doing the right thing for the wrong reasons … trying to trash Trump in his first year of office … but regardless, she did the right thing and sent a message to the world that the Fed was expecting a strong recovery under Trump. Meanwhile the RBA makes Australia look like the last place you would want your money. Then of course the US dollar stands strong and proud while the AUD turns to shit and the investors say, “Ah ha!” that proves Trump is a winner.

  13. Tom

    It’s a pity that so much of what passes for the Australian economy now turns on real estate prices.

    Real estate is the Australian replacement for an economy built on the corruption of markets caused by idiotic local, state and federal government regulation. Playing the real estate market is an emergency escape valve when what’s left of the private economy is deep in recession.

  14. Roger

    That they also think that inflation is under control is even more bizarre. I don’t know where they do their measuring, but it’s not in any of the places I go to buy things. Inflation seems to be ripping along.

    Indeed.

    And they forecast no real wage growth.

    Factor in higher electricity and gas prices to the family budget “going forward” – and who knows where petrol prices will go – along with historically high household debt levels and you’re left dangling over a precipice.

    Thank heavens we’ve had c. 25 years + of economic growth or we’d really be in a pickle.

  15. Dr Fred Lenin

    Good to se the Uniparty taking us forward into the past .
    Lets go side by side and back to back into a greener past with low wages ,no power ,no jobs ,no agriculture and no water ,forward into the 17th century comrades with our beloved leaders scomo and the albanian SCOMO and the ALBANIAN, sounds like a fifth rate stage act , two clapped out old troupers who are past it ,I like it

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