The RBA ain’t all that

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What the RBA does with monetary policy soaks up a lot of my headspace, but for ordinary folks it really isn’t that important. In addition to being a broad instrument, Monetary policy also is not that effective at shifting the GDP / employment dial (see RBA 2000 and 1997).

Econometrics really boils down to taking fancy averages, and all estimates are wrong, but the RBA papers i linked to above find that a 100bps cut in the cash rate increases GDP by about 80bps over the following three years – with the boost distributed 2/5ths, 2/5ths, 1/5th.

So a 25bps move in the cash rate will boost GDP by 20bps – spread out over three years (+8bps, +8bps, +4bps).

Say you want to lower the unemployment rate by 75bps, you probably need to lift GDP by 1.5x to 2x that number, so you would need to cut rates by 100bps to 150bps. That would measure up as a pretty normal easing cycle.

Do not expect the bank to get there quickly. They are likely to ease a cautious 25bps at a time. The economy has changed a lot over the past few years and I do not think anyone has a firm idea what neutral policy is.

What we do know is that 4.75% seems to have been pretty tight. Credit growth was very weak, house prices fell, the unemployment rate increased, and inflation declined.