Comments on: Jitters battle retail sales as RBA holds steady http://www.crikey.com.au/2009/03/03/jitters-battle-retail-sales-as-rba-holds-steady/ now with extra source Sun, 12 Feb 2012 00:58:05 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: George http://www.crikey.com.au/2009/03/03/jitters-battle-retail-sales-as-rba-holds-steady/#comment-22124 George Thu, 01 Jan 1970 10:00:00 +0000 #comment-22124 In these financial crisis days every time we hear more bad economic news nearly every commentator calls for or publicly expects another rate cut from the RBA. The RBA usually obliges. It is arguable that the RBA moved rates too high too early and kept them too high for too long. They are now moving them too low too quickly.<br /><br />There are a number problems with the reverence and central role we give the RBA and one of them is its limited policy options. It really only uses one: interest rates..and not very well. Yet is treated like some sort of sacred cow. I can understand why politicians may want to do this. It removes heat from them particularly when interest rates need increasing or when banks fail to pass reductions on. And politicians don't want to be seen disagreeing with this unelected "independent umpire". But economic commentators are another story.<br /><br />There is a major downside to rate cuts ignored by most economic commentators: they tend to restrict the availability of funds to the market through the banking system from overseas. Why? Firstly banks find it harder to get loans because they can't afford to pay as high interest rates to secure loans and still retain acceptable margins. Secondly they depress the Aussie dollar. This may be good for exports but it makes overseas lenders wary of lending in Aussie dollars and being hit with capital losses following Aussie dollar devaluations or Australian banks being wary of borrowing in US dollars and being being hit.similarly. What do cuts achieve now anyway? With rates so low it is not the cost of finance which is likely to reduce investment but the AVAILABILITY of finance and and lower consumer and business demand. These latter problems in today's environment are more likely to respond to fiscal rather than monetary policy. <br /><br />Commentators may feel safe all agreeing with each other and the RBA but they need to think a little more independently and so does the RBA itself In these financial crisis days every time we hear more bad economic news nearly every commentator calls for or publicly expects another rate cut from the RBA. The RBA usually obliges. It is arguable that the RBA moved rates too high too early and kept them too high for too long. They are now moving them too low too quickly.

There are a number problems with the reverence and central role we give the RBA and one of them is its limited policy options. It really only uses one: interest rates..and not very well. Yet is treated like some sort of sacred cow. I can understand why politicians may want to do this. It removes heat from them particularly when interest rates need increasing or when banks fail to pass reductions on. And politicians don’t want to be seen disagreeing with this unelected “independent umpire”. But economic commentators are another story.

There is a major downside to rate cuts ignored by most economic commentators: they tend to restrict the availability of funds to the market through the banking system from overseas. Why? Firstly banks find it harder to get loans because they can’t afford to pay as high interest rates to secure loans and still retain acceptable margins. Secondly they depress the Aussie dollar. This may be good for exports but it makes overseas lenders wary of lending in Aussie dollars and being hit with capital losses following Aussie dollar devaluations or Australian banks being wary of borrowing in US dollars and being being hit.similarly. What do cuts achieve now anyway? With rates so low it is not the cost of finance which is likely to reduce investment but the AVAILABILITY of finance and and lower consumer and business demand. These latter problems in today’s environment are more likely to respond to fiscal rather than monetary policy.

Commentators may feel safe all agreeing with each other and the RBA but they need to think a little more independently and so does the RBA itself

]]> By: John James http://www.crikey.com.au/2009/03/03/jitters-battle-retail-sales-as-rba-holds-steady/#comment-22125 John James Thu, 01 Jan 1970 10:00:00 +0000 #comment-22125 I think the Labor government should have held back on its massive cash splash and looked at trying to stimulate the economy by making it cheaper to employ and the RBA easing monetary policy further. We could have done that in a more considered fashion and maybe still maintained a surplus but certainly not a 60 billion dollar deficit. <br />As well as getting credit to flow there have to be incentives to help small business, especially, to keep people on the payroll. <br />Somehow we need to help the banks to lend and obtain funds at a reasonable rate. Perhaps governments should be playing a greater role in liaising with national counterparts to encourage responsible interbank lending. After all, Australia's banks strong standing has to help when it comes to freeing up capital. I think the Labor government should have held back on its massive cash splash and looked at trying to stimulate the economy by making it cheaper to employ and the RBA easing monetary policy further. We could have done that in a more considered fashion and maybe still maintained a surplus but certainly not a 60 billion dollar deficit.
As well as getting credit to flow there have to be incentives to help small business, especially, to keep people on the payroll.
Somehow we need to help the banks to lend and obtain funds at a reasonable rate. Perhaps governments should be playing a greater role in liaising with national counterparts to encourage responsible interbank lending. After all, Australia’s banks strong standing has to help when it comes to freeing up capital.

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