In October 2007 our sharemarket peaked at 6754 on the XJO index. The RBA Cash rate at the time was 6.5%. By the end of 2007, the Index closed at 6340. The RBA moved the cash rate up to 6.75%. The market rout began in earnest in the New Year and by March 2008 the Index was 5356. The RBA had moved the cash rate up to 7.25%. From the RBA Monetary Policy Statement in February 2008: "There thus remains a risk under the current monetary policy setting that demand does not moderate sufficiently to achieve forecast reduction in inflation. Absent a further shift in economic risks to the downside, therefore, monetary policy is likely to need to be tighter in the period ahead". The RBA held their rate at 7.25% until 5th August 2008, with the market now under 4900. The US Federal Reserve had commenced easing monetary policy in September 2007 from 4.75% to 2.00% in April 2008. The RBA finally recognized what was occurring around the World and started their easing cycle.
Has the RBA got it right this time round? Are they too far ahead in predicting the recovery cycle?
Retail sales for February was down a seasonally adjusted 1.4%. Department stores, clothing and footware was down a seasonally adjusted 3.9%. Food was even down 1.7% sa for the month.
Money and Credit growth according to RBA statistics are at multi-decade lows. Business credit growth is around negative 8%. Personal lending growth has just turned positive, but nothing near the 10% to 15% growth experienced this decade. Home lending is definitely growing strongly, but only as a result of subsidies in the form of the First Home Buyers Grant and a skewed tax system that gives a 100% tax deduction for expenses and 50% tax for capital gains. Owner Occupier homes are tax free. Gross Domestic Product growth is only positive courtesy of ballooning Federal and State debt that currently stands at $264 Billion, and increasing by about $7 Billion per month. Take out Government spending and GDP would contract.
The US Federal Reserve stated this week that their Monetary Policy will remain at zero for an extended period of time. Are they wrong? Their extended unemployment (U6) is around 20%, they are spending $1.5 Trillion more than they earn a year, their tax revenues are deteriorating, they have introduced a Health Bill that needs to be paid for, the whole home loan industry is on Government life support, the list just goes on. Then there is Britain, Ireland, Greece, Portugal, Italy, Spain, and some Baltic states all experiencing financial problems.
Lifting interest rates in this enviroment will only marginalize those that can least afford it. If they want to contain the housing bubble, then take away the subsidies, change tax policies and create more supply. Why does one branch of Government encourage home price inflation and the other fight against it? The single weapon of the RBA will be used indiscriminately across all sectors of the economy and there will be losers.