IMF Says Cut Rates To RBA

Doesn't Low Interest Mean It's Not Interesting?

This is news of sorts. The IMF wants the RBA to cut rates. If you ever wanted an indication that the global trend towards ZIRP in the first world, this is pretty much it.

Reserve Bank governor Glenn Stevens said last month that more rate cuts "may be appropriate" to encourage growth in demand and inflation, despite also previously warning that his power to boost economic growth by lowering interest rates is diminishing with every cut. 

But now the IMF has issued a clear warning to Australia, saying the economy has much spare capacity and the RBA may have to keep cutting rates to prevent "inflation expectations" from dropping permanently. 

Its latest World Economic Outlook also predicts unemployment will rise to 6.4 per cent this year, and remain at 6.2 per cent in 2016. Australian unemployment is currently 6.3 per cent. 

"In economies in which output gaps are currently negative [Australia, Japan, Korean, Thailand], policymakers may need to act to prevent a persistent decline in inflation expectations," the IMF has warned. 

Economists say the IMF's point about "inflation expectations" is serious because once consumers and employers believe inflation will be much lower in the future they will start behaving accordingly, with consequences for wages growth and spending.

So the IMF wants the Australian economy to continue to expect inflation as it has done for the last 40years. I don't think that's hard given the persistent gap between CPI and costive living as measured by the ABS. If the cost of living stays high, people will continue to have "inflation expectation", despite the artificially lowered CPI governments and the RBA use to claim inflation has dropped.

Be that as it may, the IMF is essentially saying that Australia is currently lining up with economies like Japan, South Korea and Thailand where there is deflationary pressures. You sort of wonder at the faith of people who keep pushing Sydney property prices ever upward. Gravity is pulling pretty hard if we're really lining up with Japan and South Korea.

It's also interesting that the IMF seems to think we're at the doorstep of a deflationary spiral without having had the property bubble pop. In Japan, the deflationary cycle started as a result of the property bubble bursting. The IMF is essentially saying the property bubble is not relevant, Australia is on the brink of a deflationary spiral based on the raw numbers. I have to confess there's a bit of cognitive dissonance there. Something's not computing.

Of course, should the property bubble pop, then we can contain there being a massive deflationary spiral simply because the heights the bubble has risen are so damn high. We can be guaranteed of ZIRP when the bubble pops, and then maybe even Australia's very own QE program after bail out of banks - but of course that would be the mark of a very advanced, mature, and uninteresting economy.