The visible hand in economics

Did the Bank start cutting too late?

Posted on: December 11, 2008

In what appears to be becoming a “stand up for the Bank” day, I was surprised to see Steve Pierson at the Standard state that he believes the Reserve Bank cut interest rates too late!

Now, if the Reserve Bank had known exactly what was going to happen in the world and decided to hike rates for the hell of it I would agree – but ex-ante they (like the majority of other people) had no idea what was going to happen.

Steve appears to believe that the Reserve Bank was lifting rates to fight an increase in the relative price of petrol even though it was “obvious the economy was in dire straights”.

However, from what I remember the Reserve Bank was lifting interest rates because actual inflation was too high (non-tradable inflation is still well outside the band), and capacity constraints inside the economy were being stretched by a resiliant housing market, and most importantly, a sudden huge terms of trade boost.

Before criticising the Bank for targeting inflation, Steve should look at the Bank’s statements and get a feeling for what the Bank terms “inflation” – a place to get a run down on this is here ;)

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7 Responses to "Did the Bank start cutting too late?"

And we know what was driving inflation. The Reserve Bank failed to look through the global commodity increase driven by the approach of peak oil.

Just a wee point, my opinions are my own, not necessarily those of my fellow Standard writers. So, if you would be so good as to attribte opinions to the specific writer, that would be cool

“Just a wee point, my opinions are my own, not necessarily those of my fellow Standard writers. So, if you would be so good as to attribte opinions to the specific writer, that would be cool”

Very fair call – I will be careful to do so in the future :)

“And we know what was driving inflation”

Yes, elevated levels of inflation expectations that found its way into the wage bargain.

“The Reserve Bank failed to look through the global commodity increase driven by the approach of peak oil.”

Huh? They let inflation expectations rise when commodity prices were at relatively low levels, but the level of domestic activity was too hot – their mistake was not lifting over 2003/04, not “lifting too much” in 2007

Oil $45/barrell and falling

Good to see the admission that peak oil is no longer a problem.

Also, peak nickel, peak corn, peak wheat, peak iron, peak copper, peak…

test comment only!

That is to say, suppressing interest cut would maximize profit. That could greatly affect home loans interest rate. For example, one Mortgage broker Brisbane would also deny any interest cut of his business. Such is a domino effect, and the tail would be passed on to those who engage in a home loan.

Hi lestat503,

I am not sure how the speed of the transmission mechanism is relevant? Ultimately, the Bank did not cut interest rates until now because it did not realise how sever the slowdown in global economic activity would be – no one did until a few weeks after Lehman’s collapse.

There is a definite lag in policy, and that won’t be helped by the fact that credit markets are in chaos – however, the main reason that they did not cut was imperfect information. I still think that what they did was right (at least over 2007) ex ante.

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