Aust. low inflation & RBA meeting 01 May 2012

[Starcraftmazter]

With such a low measure of inflation, what's to stop an RBA rate cut?

Common sense. Warwick McKibbin was on some show this week saying that rate cuts wouldn't do crap, and I agree.

The only thing that they could do is bring forth some demand in housing. And that's a very very bad thing.

Unfortunately Stevens will have to worry about assassination attempts if he doesn't lower

I am hoping it's only 25bps and it's all gobbled up by the banks and none given to speculators...sorry I mean mortgagees. That would be good.


Let's face it - all low rates do is create malinvestment and speculation. They will not help our economy, for that wages need to dramatically fall and so does the AUD. Lower rates will not achieve both of these, in fact rates need to rise to achieve both.


Also I will note that all the things that matter in the CPI rose significantly - housing, transport, healthcare and education. Food is just being seasonal - and quite frankly, the RBA own us for completely failing to keep inflation under control for the last several years. And this is quite remarkable, considering they have the highest inflation target of any central bank in the developed world.

No, I demand a deflationary spiral and a depression before tomorrow morning. That is the only thing which will benefit Australia economically in the coming decades.

 

[moXJO]

Let's face it - all low rates do is create malinvestment and speculation. They will not help our economy, for that wages need to dramatically fall and so does the AUD. Lower rates will not achieve both of these, in fact rates need to rise to achieve both.


.

Could you explain why higher rates = lower AUD

 

[Starcraftmazter]

Could you explain why higher rates = lower AUD

Certainly. Higher rates will pop the housing bubble very nice and quickly, plunge the economy into a prolonged recession (this is inevitable - we would simply stop delaying it and face it already), and thus our dollar would fall to 60ish cents where it belongs.

We can lower rates once it happens by the way to ensure our currency is not prime for speculation.

 

[doctorj]

Certainly. Higher rates will pop the housing bubble very nice and quickly, plunge the economy into a prolonged recession (this is inevitable - we would simply stop delaying it and face it already), and thus our dollar would fall to 60ish cents where it belongs.

We can lower rates once it happens by the way to ensure our currency is not prime for speculation.

This is rather novel.

 

[Starcraftmazter]

This is rather novel.

Yes, it is quite simply isn't it.

 

[young-gun]

Yes, it is quite simply isn't it.

its a shame common sense does not seem to prevail

 

[tinhat]

Food is just being seasonal...

Actually, the seasonally adjusted figure came in lower at -0.2% The trimmed mean came in at 0.3% for the quarter and the weighted mean at 0.4% so on any of those measures we can say that inflation is at the lower end of the target range.

No, I demand a deflationary spiral and a depression before tomorrow morning. That is the only thing which will benefit Australia economically in the coming decades.

What about throwing in some good old fashioned strong man fascism and a war?

 

[tinhat]

Sorry for asking a really basic question, but why does the RBA need to react to low inflation figures? I thought too high an inflation rate would be a problem, but the reverse?

The CPI is based on a sample data set. Modelling CPI is a slightly contentious issue. When we do end up with a figure it is backward looking. Note that the ABS publishes several CPI figures but the one most widely reported and commented on is the headline rate. Underneath the headline rate, different sectors of the economy will have performed differently; some sectors are currently experiencing deflation as any retailer will attest to.

The contemporary wisdom amongst economists is that deflation is to be avoided at all costs. Inflation is bad but deflation is worst. Deflation causes spending and investment to be postponed in anticipation that things will get cheaper, reducing demand further.

Economic growth is required to maintain full employment. To achieve economic growth, demand must grow. In the short run at least, markets cannot allocate resources at theoretical equilibrium. The best explanation I can give for targeting a moderate rate of inflation is the little bit of friction in the system that one expects in reality (although theoretically, markets should operate at zero friction).

So while in theory zero inflation might be good, in practice we expect a healthy economy to display a moderate rate of inflation and we expect monetary policy to keep economic activity away from the dangerous zone of deflation.

 

[Starcraftmazter]

TD inflation came in at 0.3% for April (0.5% for March).

I'm really hoping it will be no more than 25bps and the banks just tell people to piss off.

 

[McLovin]

The best explanation I can give for targeting a moderate rate of inflation is the little bit of friction in the system that one expects in reality (although theoretically, markets should operate at zero friction).

This is pretty much the issue. Prices can fall quickly but imagine a government trying to lower the minimum wage in reaction to falling prices. So in a period of falling prices, firms profit margins will bare the cost. It also stops investment; why invest in that new plant today when it will be cheaper tomorrow.

Most deflationary environments are linked to some pretty nasty underlying microeconomic issues. The keiretsus in Japan are an interesting case study, for anyone interested.

 

[young-gun]

TD inflation came in at 0.3% for April (0.5% for March).

I'm really hoping it will be no more than 25bps and the banks just tell people to piss off.

i think we both know it will be a minimum 50 cut from the rba, with banks maybe passing on 20-25 points..jmo, dont forget theyre doing it tough

new home sales at decade lows too

 

[jet328]

It also stops investment; why invest in that new plant today when it will be cheaper tomorrow.

You hear this line trotted out all the time but is it really true?
If productivity growth is running at 1% per year, will it really stop you from buying a bag of apples because they'll be 1% lower? Stop you from investing in a business for 1% difference a YEAR later. Heck most businesses have computers, and not only do the deflate faster than productivity growth the computers get faster as well.

Computers, flatscreens, smartphones, ipods....
We all own them, we all know they'll be better and cheaper in a year, yet they sell like hot cakes...

 

[McLovin]

You hear this line trotted out all the time but is it really true?
If productivity growth is running at 1% per year, will it really stop you from buying a bag of apples because they'll be 1% lower?

A firm making a capital investment decision is not the same as someone buying a bag of apples. And yes, in a deflationary environment, where firms believe the cost of the widgets they will manufacture will fall in subsequent years, that has to be factored in to the capital budgeting decision.

 

[kid hustlr]

V suprised by the decision today. Looks like a bit of a panic to me, why not just steadily cut by 25 bps?


World economy is scared of delation if you ask me, they'd much be above 3% inflation than under 2

 

[Timmy]

V suprised by the decision today. Looks like a bit of a panic to me, why not just steadily cut by 25 bps?


World economy is scared of delation if you ask me, they'd much be above 3% inflation than under 2

We get the full statement on May 4, so expect more detail on the 'why' then. Expect something re European probs back in the spotlight, growth in the US coming in slower etc. Low inflation here in Aust. has given them room to move.

 

[joea]

V suprised by the decision today. Looks like a bit of a panic to me, why not just steadily cut by 25 bps?

World economy is scared of delation if you ask me, they'd much be above 3% inflation than under 2

This is no suprise.! It has been mentioned prior to the cut today, that there would possibly be at least 0.75% cut before December.
If you look at the interest rate around the world, you will see they are close to zero.
At the very least Australia has room to move.

The question now, is it too late.?

The April PMI Manufacturing Index was announced today at 43.9. That is a drop of 5.6 points.
I think if it goes below 42, we are in trouble. This is a severe contraction in our economy.
joea

 

[Uncle Festivus]

It must be worse than I thought? Are they joking or are we heading for GFC II?

 

[skc]

It must be worse than I thought? Are they joking or are we heading for GFC II?

May be the RBA thinks only half will get passed on anyway so to get a 25bps impact on the economy they'd need a headline cut of 50bps.

But if they think that's going to save retail, manufacturering or house prices, they are being optimistic imho.

 

[notting]

May be the RBA thinks only half will get passed on anyway so to get a 25bps impact on the economy they'd need a headline cut of 50bps.

That would be the thinking!

But if they think that's going to save retail, manufacturering or house prices, they are being optimistic imho.

Good thinking too.

 

[kid hustlr]

It just gives a strange message if you ask me. Whenever people think of rate cuts more than 25 bps they think GFC.

It wouldn't surprise me if declining house prices were a major reason for the severe cut.