Reserve Bank should have waited to cut rate

Australian Conservatives Release

Reserve Bank Governor Philip Lowe and US Federal Reserve Chairman Jerome Powell have similar agendas, to lower interest rates to sustain expansion and stop inflation slipping back. We are heading into an era where central bankers around the world are trying to use interest rate reductions as a weapon to cushion their economies from the ramifications of a US-China trade war.

The Conservative Party has urged caution on rate cuts, as cutting interest rates in the current economic climate, has the potential to do more harm than good.

Robert Gottliebsen writes in The Australian:

In both the US and Australia a rate cut is bad news for short-term bond holders but good news for equity, including property.

But in Australia we are way behind in embracing artificial intelligence as part of the fourth industrial revolution, so the strategies of Telstra chief executive Andy Penn are a short-term problem for Lowe.

I will return the wider implications of the Penn message later.

What sent Wall Street skyrocketing on Monday was the Federal Reserve’s indication that it would do whatever was required to sustain the US expansion. Wall Street interpreted that as meaning lower interest rates, and it’s lower rates that are currently the main force driving shares.

But in his Martin Place bunker, Lowe will have seen US reports on the fallout from the US-China trade war that both scared and excited him. The Chinese have warned their citizens against travelling to the US and already Tiffany sales are down 25 per cent, mainly reflecting lower spending by Chinese.

A similar warning for Australia could ravage our tourism and education industries, which are our main exports after minerals.

Had the ALP won the election, such an action against Australia would have been most unlikely and our education and tourism industries would have boomed because Chinese students and tourists would have switched from the US to Australia. But in the past year or two, the Coalition has completely botched our relations with China, and I am not sure we have the politicians or public servants with sufficient skills to reverse it.

Meanwhile, in Australia, I had an unusual experience as Lowe was announcing the interest rate reduction.

I was in the company of a person who was looking to buy a house. Lowe’s action made that person feel better about taking the plunge, but then flashing on The Australian’s website was the news that Telstra was going to cut jobs by 10,000. Even worse, the Telstra boss, in the eyes of the prospective homebuyer, was urging other companies to follow.

That might not be exactly what Penn said, but to the prospective homebuyer his message was a stark warning. Penn said: “What I have learned in the last seven years during my time at Telstra is that almost every industry, every leader, every government is underestimating the level of technological change that is coming.

“I am not a technologist by background, but I have invested deeply in my own learning over the last few years because I can see the profound implications and opportunities it presents.” To the economy that means better productivity, but to the ordinary citizen that means that people aged between 30 and 50 – unless they have the right skills – need to be scared about their job security.

Yet to buy a house that is not too far out of Sydney and Melbourne means they have to borrow large sums, usually a million dollars in Sydney.

They ask: “Is my current job and the job of my spouse/partner safe?” On average the answer is probably “no” .

There is little doubt that Australia’s low inflation has played a big role in the Reserve Bank decision to reduce interest rates.

The fear of job insecurity and the substantial reductions in costs that come with the new technologies have played a big role in curbing inflation around the world and it looks set to play an even bigger role in Australia. Nevertheless, it is strange to see the Reserve Bank reducing interest rates at a time when there has been a surge in business confidence as a result of the May 18 election.

According to Morgan Research 51.3 per cent of businesses (up 3.6 per cent) think next year will be a good time to invest in growing the business, while only 36 per cent say it will be a bad time to invest, which is the lowest figure for this indicator since February 2018.

Much of the survey was conducted before the federal election, so the momentum is likely to increase.

As I pointed out at the weekend, we are seeing considerable activity in the building and development area and the purchase of existing houses and apartments. Sydney apartments in the slump fell about 30 per cent and have now recovered 10 per cent in the two weeks since the election.

On a purely domestic basis, I think it would have made good sense for the Reserve Bank to hold the rate cut until it determined whether this rapid quick recovery was sustained into June and July.

Given the credit squeeze has been eased, I think there is a good chance that it will be sustained, unless the deteriorating situation in the US-China trade dispute starts to affect global business confidence.

Lowe will have known that further US interest rate reductions were likely, so if we held our ground the Australian dollar would have risen, so removing an important boost for the economy.

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