So, the board of the Reserve Bank of Australia decided to cut the cash rate again yesterday, reducing Australia’s benchmark interest rate to a historic low of 2.5%. There are obviously many opinions on why the RBA has cut the rate, and especially why it has chosen to do so now. The Conversation put the question to several notable economists yesterday, and it just so happens that one of them was an old Professor of mine: Professor Jeffrey Sheen. Here is some of what Prof Sheen had to say:
Prior to the decision, I did not think a rate change was necessary.
There’s no new information to change my mind on that and so I think it was an unnecessary rate cut. The main justification given is that they previously noted the inflation outlook provided some scope to ease policy further. But inflation is in the middle of their target range, and so I don’t think they have scope to do much. If it goes above three they are outside of their range.
I don’t think inflation is likely to fall. I think the deprecating Australian dollar will push up import prices, which will push up inflation.
I don’t see that this cut will stimulate demand. I think the biggest problems now for the Australian economy are fiscal policy and microeconomic reform issues.
As it happens, a couple of months ago, shortly after RBA had cut the rate to 2.75%, I interviewed Prof Sheen, and asked him whether these rate cuts could come back to haunt us in the future. Here is the audio:
As before, I am unable to embed the audio in the email blast. You will have to visit the site to listen, and possibly turn off some do-not-track and cookie blocking functions.