Economists left short changed after betting on rate cut

Posted November 06, 2012 19:05:00

The Reserve Bank has left the official cash rate unchanged at 3.25 per cent. Some of Australia's leading economists have gone on the public record criticising the bank's decision. Macquarie Bank, for example, argues the RBA needs to start preparing the economy for life after the mining boom. The bank though says previous rate cuts are still working their way through the economy and the international macroeconomic environment has stabilised.

Source: PM | Duration: 4min 33sec

Topics: business-economics-and-finance, banking, markets, regulation, australia


MARK COLVIN: The racing experts weren't the only ones blindsided by an unexpected result today.

Some of Australia's leading economists were on the public record predicting that the cash rate would fall but it didn't.


The bank says previous cuts are still working their way through the economy.

So where does that leave borrowers?

I'm joined in the studio by finance reporter David Taylor.

MARK COLVIN: Surprise to the markets?

DAVID TAYLOR: Yeah look, it was a bit of a surprise to the market but it was one of those interesting days where you know in the lead up to the Melbourne Cup everybody thinks they know the favourite, I think Americain was the favourite today and everyone assumes that if they put a conservative amount of money on that then the horse will come through and everything will be fine and then you see the race come through and someone else completely different to what you expect wins the race.

It really wasn't that much different today even though apparently was split on a rate cut today. The Aussie dollar proved an entirely different story.

The Australian dollar rose from 103.6 US cents to 104.3 US cents. Now it doesn't sound like...

MARK COLVIN: Presumably the markets have been discounting for a rate drop.

DAVID TAYLOR: Precisely. So if rates are left unchanged and there's that gap between what rates would have been, or what the market was pricing in and what they've actually ended up, even though they haven't changed, the market sees more attraction to yields or deposits or whatever you like in Australia and that makes the Australian dollar more attractive so naturally it rises.

And economists also, their main argument today was what happens post the mining boom? What happens to our economy post the mining boom?

Many economists argue that the Reserve Bank certainly needs to prepare the economy for that situation. Brian Redican is one of those economists at Macquarie Bank.

BRIAN REDICAN: I think there is a little bit of confusion within the RBA about the different forces affecting the economy. The clear risk from our view though is that with mining investment peaking within the next 12 months it's really now that the RBA has to get rates quite aggressively down to ensure that other sectors, such as housing construction, are able to take the engine of growth away from the mining sector.

And by sitting on rates now, potentially an environment where unemployment's rising, it could be sending precisely the wrong message.

MARK COLVIN: Macquarie Bank economist Brian Redican. Well what reasons did the Reserve Bank for leaving the cash rate unchanged, David Taylor?

DAVID TAYLOR: Well Mark, essentially it started by saying that since November of last year rates have come down by 105 basis points; rates this time last year around about 4.75 per cent.

So, clearly the Reserve Bank is saying monetary policy is a blunt instrument. It's not like fiscal policy. You don't inject a huge amount of cash into the economy and then suddenly you see the results. These things take time, consumers are still de-leveraging and they want to wait to see what will happen once all of those rate cuts work their way through to the system and that could be until early next year. We'll have to wait and see about that.

MARK COLVIN: Well, so I suppose there'll be more clues in a fortnight when they release their detailed reasoning.

DAVID TAYLOR: Yeah and inflation details to come early next year too. But in addition to that, the Reserve Bank's actually said that the inflation rate we got last week was a little bit uncomfortable as far as they were concerned.

It was about 2.5 per cent; that's underlying inflation. And they've said that even though economists have said unemployment is ticking up higher and shouldn't we have lower rates to cater for that, they're saying well if unemployment rates rising won't that put a dampening effect on inflation?

So they've said inflation up, last week, they've said unemployment up and maybe those two will cancel each other out.

And the last thing I should say I suppose is that there's been this concern about China, Europe and the United States. The Reserve Bank has said well Europe has stabilised, China hasn't had a hard landing and let's wait and see what happens with the US fiscal cliff.

But from that international macro-economic perspective the Reserve Bank's saying at the moment it's stabilised.

MARK COLVIN: So since the economic pundits got it quite wrong today, are there any straws in the wind for when it might go down?

DAVID TAYLOR: Well, I'd like to give you a clear answer on this but when you listen to economists...

MARK COLVIN: Well if you can't, don't.

DAVID TAYLOR: Exactly (laughs). Well, look I'm going to cross my fingers and simply say that the Reserve Bank, well one of the leading economists in Australia today said that at the end of the statement it says that the stance for monetary policy at the moment, according to the Reserve Bank, is appropriate for the time being.

He said, "Oh that means that next month they'll move, no doubt about it." But...

MARK COLVIN: (Laughs) and so we go around again.

DAVID TAYLOR: That's right. But look what I've seen in the statement is that it says that recent cuts are still working their way through, that's what I said earlier, and it's also what it said in the minutes of the last meeting prior to this one.

So, look, I would say it's, again, it's an even money bet for December.

MARK COLVIN: Thank you David Taylor