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Jonathan Street, CEO, Thinktank
When the Reserve Bank Board decided to hold the cash rate steady at a record low 75 basis points last Tuesday, the market was not surprised. Although there had been mounting speculation late last year that the Reserve Bank might take the opportunity at its first board meeting in 2020 to cut the cash rate by 25 basis points, some positive news in the intervening period quickly put an end to that speculation.
In particular, the good unemployment result for December was the biggest nail in this rate-cut coffin. And Governor Philip Lowe was at pains in a speech the following day to suggest there was no change on the horizon – provided the key performance statistics did not deteriorate.
That message was reinforced last Friday when the Bank’s quarterly Statement on Monetary Policy was released, albeit in a much lengthier fashion, with the bank taking a glass half full view of the economy. “GDP growth is expected to improve over the course of this year and next … at 2.75% in 2020 and about 3% in 2021 – a step up from the growth rates recorded over the previous two years.” The bank’s bullish view was based on low-interest rates stimulating the housing market and household spending, as well as a turnaround in mining investment. Even the drought and the horrific bushfires did not dampen its medium-term optimism for the economy.
Some market economists have questioned the Bank’s buoyant note. They argue the drought and bushfires will have a bigger impact on growth than it predicts. Adding weight to their more pessimistic views are the mounting economic consequences of the coronavirus, although, in fairness to the Bank, its impact would not have been apparent when the Statement on Monetary Policy was being prepared.
So, the two economic themes dominating the public debate are whether growth has turned the corner or whether the slowdown still has a way to go, with the coronavirus only adding more room for uncertainty into the mix. If the latter view prevails, then its proponents argue that the Bank will have little option but to cut the cash rate again.
What no one is considering is a third option – not only that growth picks up, but that inflation does too. At this stage of the economic cycle, an inflation rate that falls outside the Bank’s target range on the high side seems highly unlikely. But if history has taught us anything, it’s simply this. The instant we believe an economic state of affairs is the norm is the very time to anticipate change – including catastrophic change.
Think the economic boom of the 1920s before the 1929 market crash that marked the start of the Great Depression or the bull market that preceded that 2008 Global Financial Crash (GFC). It doesn’t have to be bad news, however. What Australian economist in 1991, as the country was slowly emerging from the deepest recession since the Great Depression, would have predicted from those ashes the country would emerge to enjoy nearly 30 years of continuous growth