In the past week, the global economy has changed, and not for the better. But apparently we will have to wait until after the election for the Reserve Bank of Australia to bother doing anything.
In 2020, when the pandemic took hold in Australia, the Reserve Bank board met on 3 March to cut the cash rate by 25 basis points to 0.5%. Within a week it was clear this was not enough. The world had changed and waiting until April would be negligent. And so the RBA board met on 19 March, cut rates again and also announced further measures.
This is the great thing about monetary policy – the Reserve Bank doesn’t need to spend weeks negotiating with crossbenchers or drafting the legislation. Nor does it have to worry about budget cycles or an expenditure review process.
It can meet and cut rates in response to events.
Last week we had an event. A big one. One that no one on the RBA board or executive has ever experienced.
That’s because no one has ever experienced a US administration so divorced from reality that it apparently thought using the same formula as ChatGPT to set tariffs on every import in the US was a smart way to do things.
No one has ever experienced a US president so surrounded by selfish and incompetent advisers that not one even thought to ponder why the US was placing a tariff on penguins.
No one has ever experienced a global recession where we know precisely which individual on the planet is to blame.
How utterly changed are things?
Well last Tuesday after the RBA put out its statement saying everything was uncertain it may as well do nothing, investors thought the likelihood of a rate cut in May was no better than 39%. By Friday last week that was up to 70% and on Monday it hit 96%:
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Even more, consider that back in February after the RBA cut rates, the market peered into its crystal ball and thought the RBA was pretty much done with rate cuts and we may get only another two over the next 18 months. By Tuesday last week this was changed to perhaps three, but don’t bet you mortgage on it.
Now five rate cuts by the end of the year is on the cards:
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And this was before Donald Trump decided to put a 104% tariff on imports from our biggest export destination, China. It was not a shock on Wednesday morning the ASX 200 fell 2% in the first 30 minutes.
So much for worries about inflation; now the worry is that Trump – who appears to think a trade deficit is the same as a tariff – is going to keep tariffs in place and send the world into a recession.
The maths is pretty simple – Trump’s tariffs make things more expensive for Americans, which means businesses and households in the US will buy less stuff (both imports and domestic).
China also has responded with more tariffs, and so too has the EU.
So around the world people and businesses will pay more for things. Their incomes have not increased, so everyone will buy less, which means less gets made, which means fewer people employed to make things, and … well … welcome to recession town. Population: all of us.
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Such maths does appear to be beyond Peter Dutton, who on Tuesday took the extraordinary step of suggesting it was all Labor’s fault.
He told reporters that if the treasurer, Jim Chalmers, “believes that it’s necessary to drop interest rates by 50 points in a month’s time, he’s telling Australians that there are difficult times ahead under Labor. That’s exactly what he’s doing.”
That may be the most deluded statement I’ve heard from a major party leader for a long while.
The only reason the RBA may cut rates is because the person who got control of the Oval Office decided to make everyone poorer.
The amount of LNP Kool-Aid you would need to drink to think this is Anthony Albanese’s fault is beyond the stomach capacity of most.
But what will either leader do should Trump continue to display the economic understanding of a piece of navel lint?
Would Dutton or Albanese contemplate stimulus measures such as what occurred during the GFC (which worked, and which is why in Australia we call it the Global Financial Crisis, while in the UK and US they call it The Great Recession)?
On Tuesday, Dutton said his government would always “live within its means”. OK, but in a recession that means austerity, so is that what he is saying?
But even more urgent is what will the RBA do, and why isn’t it doing it now?
Last Friday in my role as chief economist of the Australia Institute I called for the RBA board to act like it did in the pandemic and call another meeting. Why are we waiting until 20 May to respond to tariffs that are having an impact now?
Why did the RBA board meet last Monday and Tuesday when they knew Trump was announcing his tariffs on Thursday morning? Why not delay the board meeting until after that, given things would have been a lot less certain than was the case just two days earlier?
Monetary policy is meant to be nimble, and yet our central bank is acting as though it has to abide by fixed dates.
Yesterday the Treasury held a meeting with the heads of with the RBA, Australian Securities and Investments Commission, Australian Prudential Regulation Authority and Australian Competition and Consumer Commission. That is rather exceptional. And yet our central bank continues to act as though nothing out of the ordinary has happened.
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