Monday, 5 December 2011

The Rate Cut - It's NOT a Christmas Present

Today's interest rate cut is to the economy what pumped up tyres are to a car. Essential for maintaining a steady pace and hugging the road. The types were getting flat and they needed some inflation. The rate cuts are NOT a "Christmas" present to anyone, even though it will obviously help to support demand, spending and jobs.

Christmas presents are usually about indulgence and excess and this policy easing has nothing to do with that. On the contrary, the wonderfully pragmatic and independent RBA knows full well where the risks to growth are and it knows that it might be looking down the barrel of some low inflation figures, even if it hasn't yet the will to change its forecasts. The RBA can see the massive contraction hitting the economy through one of the most dramatic tightenings in fiscal settings on record.

Even though the RBA sets policy independently, the Government can clearly take some credit for the interest rate cuts with its stead-fast grip on the Budget.

Let's not get exciting or ebullient about these rate cuts. There are not presents but rather a sensible realisation that fiscal and monetary policies can be complementary and set for different objectives. Fiscal policy is set to smooth the cycle and build savings when times are good (and vice versa) with monetary policy targeting inflation and do it through observation of growth and capacity pressures.

For this, the RBA and the Government ought to be congratulated. It's a new policy era we are seeing evolve.

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