Gregory tips a 1.5% cash rate low

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Macrobusiness has a note that is a nice counterweight to Chris Joye’s McKibbin note earlier this week. The ANU’s other ex-RBA board member, Bob Gregory, has a very different view to Warwick McKibbin.

There was a bit of fanfare earlier this week about WM saying that the RBA should not have made the last 50bps of cuts and that 3% was likely to prove the low in rates. Bob has the other side of that bet in size — tipping a possible 1.5% low for the policy rate.

“Interest rates will fall. But I don’t think it’s going to work that much.”…Professor Gregory predicted that Australia’s real income could fall by 15 per cent in the next few years and whatever government gained power would have to convince people to accept lower living standards.

“The investment boom is going to peak and I can’t see something filling the whole quickly,” he said.

My sympathies lie with Bob.


  1. McKibbin was talking about a bubble last time I heard but what type of bubble is he seeing.

    I didn’t hear that. I find it very strange to hear of worries about any sort of bubble when nominal GDP is running below trend

  2. Well, as I keep parroting, low rates are a sign money has been too tight. The RBA can end up with whatever cash rate it wants if it behaves accordingly. At the moment, monetary policy is only slightly stimulatory, and even that is due to an exogenous easing of monetary conditions over Dec-Jan (rising commodity and o/s asset prices have increased the Wicksellian equilibrium rate of interest). If markets have a significant pullback, monetary conditions will tighten again. After Stevens’ appalling “Glass half full” speech in June, the RBA had a great opportunity to start putting things right on Cup Day, but flubbed it. Three cuts in a row (Oct, Nov and Dec) would have conveyed to the public that the RBA was concerned about growth and would do “whatever it takes” to get nominal growth back on a 5-6% track. We could have reached the bottom of the cycle back by Xmas. Instead, the RBA hesitated and set things back another couple of months. They had another opportunity on Tuesday to give some momentum to the upswing, but wimped out again. The tone of the statement was appropriate, but that alone is not enough. Unless asset markets keep rising, 25bp in March won’t be enough – again. It’s easy to see how we could end up at 1.5%, or even lower if the RBA keeps signalling that it is happy with 4% NGDP growth.

    Incidentally, the (in my view) confused comments from both McKibbin and Gregory (confused for different reasons) make me think that not having academic economists on the RBA board is no great loss. The sooner we run monetary policy according to the outcomes of an inflation or NGDP prediction market, thereby enabling a monkey to sit in Martin Place, the better. /rant over

  3. Any views on the SOMP? The journo from the Oz seems to have read a different one to me.

    1. I am planning a post on it — but the short of it is that it has a few inconsistencies that i struggle to reconcile. The main one being that they cut their inflation and growth projections, and we are now expected to spend most of the forecast period below trend for growth and sub-target for inflation — historically, the RBA has cut when they have downgraded their growth and inflation numbers. It seems they are hopeful that improving global growth and easier financial conditions mean they don’t need to cut — i am not so certain they will be right about this. I think if house prices or equities took a turn down that they’d cut fairly smartly.

      1. Thanks. They seem very focused on rates relative to historical averages rather than on overall monetary conditions.

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