Reserve Bank misses opportunity for cash-cut rate

Reserve Bank deputy governor Guy Debelle at RBA headquarters in Sydney. Picture: John Feder

The Reserve Bank has the proof it needs to justify its fourth cash rate cut this year at its December policy meeting on Tuesday, but has instead signalled it wants to sift the economic tea leaves a little longer.

Delaying the rate cut ignores a key juncture for the economy and an opportunity to remedy one of the big issues plaguing the country — a stubborn downturn in consumer spending.

Lowering the official cash rate from 0.75 per cent to a record low 0.50 per cent next week would support besieged retailers during the crucial Christmas shopping period. It would also help to drown out headlines on Wednesday, around what is expected to be another mediocre quarter for economic growth.

Economists expect the economy to show just 1.6 per cent year-on-year growth in the third quarter, well below the pace needed to reverse a recent worrying rise in unemployment.

To be sure, there has been little good news of late for the economy despite the rate cuts in June, July and October and the income tax cuts rolled out by Canberra in July.

Shane Oliver, chief economist at AMP Capital, said the run of weak economic data of late has extended to the job market, retail sales, housing construction and business investment.

Data on Friday showed demand for loans ran at its weakest pace in almost a decade in October, while credit to the housing sector is at its weakest since records began.

Speeches by RBA governor Philip Lowe and deputy governor Guy Debelle last week were also replete with warnings about the outlook for the economy.

Mr Debelle pointed to risks that wage growth agreements are in danger of becoming entrenched at levels too low to help lift inflation. In a country where household debt is at almost 200 per cent of annual gross disposable income, soft wages growth will guarantee that consumers remain indoors.

Dr Lowe, in turn, detailed just how the RBA will approach ­alternative monetary policy measures, should they be needed in the future.

He told market economists at a dinner that he didn’t think alternative policy measures would be needed in the end, yet his speech clearly indicated that the RBA was preparing itself for just such an eventuality.

Economists expect the RBA will step out into the world of QE in late 2020. To be clear, that is at any time from July onwards — as little as seven months away.

“While the governor set a high bar for quantitative easing, our view that unemployment will climb further and inflation will fall further below the RBA’s target suggests that the bank will be forced to begin quantitative easing in 2020,” said Ben Udy, economist at Capital Economics.

Current betting among market economists is that the RBA will sit on its hands before cutting interest rates at its first policy meeting in 2020, in February.

A smarter move would be to cut this week, and perhaps kickstart something for consumers ahead of what is otherwise expected to be another grinding year of sluggish economic activity, weak wages growth, higher unemployment and missed economic forecasts.

So far, there is little evidence that the stimulus measures are coaxing consumers to spend. Without another rate cut, even if the Grinch intends to steal Chris­tmas again this year, he needn’t bother. It won’t come anyway.