The RBA has cut rates three times when it didn't need to: Christopher Joye

The RBA has cut rates three times when it didn't need to: Christopher Joye
The RBA has cut rates three times when it didn't need to: Christopher Joye

The Australian economy expanded by an extraordinary 1.3% in the first quarter of 2012 in seasonally adjusted terms, smashing consensus expectations of a 0.6% rise (with Goldman Sachs at just 0.2%). Only one forecaster, ANZ, got anywhere close to the number with a 1% guess. The fourth-quarter GDP results have been revised up from a weak 0.4% to a relatively more normal 0.6%.

The annual year-on-year rate of economic growth in Australia was a way above trend 4.3% in the March quarter, versus the 3.3% expected by economists. This is truly incredible. On the basis of the ABS National Accounts data, the droves of analysts who claimed Australia was growing at a "sub-trend" or "modest" pace, including the RBA, were way wrong. Despite the very high Australian dollar, the economy has been booming. Crucially, this also includes consumer spending.

One of the most important drivers of Australia's above-trend economic growth over the last year has been household consumption. In seasonally adjusted real terms, household consumption rose by a stonking 1.6% in the March quarter alone, and by 4.2% on a year-on-year basis. Household consumption is now running significantly above the 3.6% per annum long-term average since 1959.

Importantly, the GDP data reconciles with the stubbornly strong labour market data – at least as it has been reported thus far (we wait for an update tomorrow, which is expected to be weak).

The RBA has evidently cut rates three times when it did not need to. On the basis of this information, the RBA's "insurance" rate cuts in December 2011, May 2012 and June 2012 were totally unnecessary. As I have regularly argued here, the harangued Australian central bank has been doling out free "insurance" when it did not need to, and has punished hard-working Australian savers in preference to less prudent borrowers. Of course, it has been happy days if you have had a variable rate mortgage, as more than 90% of residential borrowers do!

Yesterday I wrote that if I were running the RBA I would not have cut in December, would have only cut once in May, and would not have cut in June. I have been a fairly lonely voice in arguing that there was no need to slash rates, and that RBA risks over-engineering policy. That domestic growth was not in desperate need of interest rate support as so many analysts claimed.

Expect to see boatloads of spin explaining Australia's official economic growth data. It is a profound embarrassment for the many doomsayers who have incorrectly misled us to believe that Australia was experiencing a household spending recession, that the economy was on the brink of collapse, and that only ultra-low interest rates held out hope for saving our bacon.

Perhaps most significantly, today's economic growth data, combined with the labour market data over the last 12 months, proves once and for all that the RBA's monetary policy settings over 2010 and prior to November 2011 were spot-on.

Christopher Joye is a leading financial economist and a director of Yellow Brick Road Funds Management and Rismark. The author may have an economic interest in any of the items discussed in this article. These are the author’s personal views and do not represent the opinions of any other individual or institution. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations.

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