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Cthorm sent me the following:

The Reserve Bank of Australia cut its benchmark interest rate by a quarter percentage point to the lowest since 2009 as Europe‘s debt crisis and slower Chinese growth overshadowed a stronger domestic labor market. Governor Glenn Stevens and his board lowered the overnight cash rate target to 3.5 percent, the RBA said in a statement in Sydney today. . . . The jobless rate in Australia [4.9%] is less than half the 11 percent in the euro area and lower than the U.S.’s 8.2 percent. In his statement, Stevens noted the local job market’s improvement. . . . The RBA, in its quarterly monetary policy statement released May 4, cut growth and inflation forecasts. It predicted average growth of 3 percent in 2012, down from a February estimate of 3.5 percent. Consumer prices will rise 2.5 percent in the year to December, from a previous prediction of 3 percent; underlying inflation is forecast at 2.25 percent from a previous estimate of 2.75 percent, the RBA said. Today, Stevens said: “The board judged that, with modest domestic growth and a weaker and more uncertain international environment, the outlook for inflation afforded scope for a more accommodative stance of monetary policy.”

Forget about the implied 5.5% NGDP growth forecast. Australia has a 2-3% inflation target and faster trend RGDP growth than the US. That sort of nominal growth would be beyond my wildest dreams for the US. Rather think about how proactive they are. Unemployment is low and inflation is in the sweet spot. But they are easing monetary policy because they see the global slowdown, which for some reason the much more sophisticated Fed and ECB don’t quite comprehend. They aren’t cutting rates because 5.5% NGDP growth is too low, they are cutting rates to make sure that 5.5% NGDP growth happens.

The Fed seems content to wait until our recovery is off the rails, and then pull out still another QE, each one less stimulative than the last, because they mostly work via signalling. Every time the Fed fails to carry through it losses a little more credibility. And the biggest irony is that the credibility loss they are worried about is too much inflation! That’d be like Mitt Romney worrying that people will regard him as too spontaneous and reckless.

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This entry was posted on June 05th, 2012 and is filed under Monetary Policy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



