''As we noted earlier in the week, we think Tuesday’s RBA cut could be the last in this easing phase. The global cycle seems to have stabilised, with China bottoming out. We expect Chinese growth to pick up next year from 7.8% to 8.6%, which should provide support for commodity prices. Locally, we are seeing early signs that below-average interest rates are starting to support housing construction, house prices and consumer sentiment. Looking forward we expect to see further rebalancing of Australia’s growth.''
I'm starting to agree with this sentiment more and more. Monetary policy isn't working in the economic backdrop we currently have. In today's fin the word is that the govt is set to abandon the surplus in favour of a deficit. In this regard i agree completely with McKibbin. What's the point of trying to use monetary policy to get out of this funk and lower the dollar when it's a completely blunt tool right now and it isn't working. What's more, the sustained low rates have the negative consequences of potentially firing up an overheated housing market or creating problems down the line elsewhere. Ultra low rates distort capital allocation. It's much better to utilise fiscal policy as McKiibin has argued. Basically we borrow at these low rates we have and invest for the LONG TERM in infrastructure. Sure it sounds boring and the stimulus will take a while to filter through, but the alternative isn't going to work, and at least with fiscal policy we will have usable infrastructure that will payback the debt with the economic utility it adds.
What we need is a fiscal deficit (funded at low rates) used to fund infrastructure that adds economic utility and can pay back the deficit. This will eventually force rates to more normalised levels. Also throw in some much needed tax reforms and it's going to be a better solution than the RBA following the rest of the world down to our ZIRP (2%) and not getting the desired results.
