Former RBA board member calls 25-point cut a 'silly situation'
Inflation looks reasonably under control, and it has looked like that for some time, says Adrian Pagan, professor of economics at The University of Sydney.
“I can’t see the reason why you would cut interest rates by 25 basis points – I don’t believe in 25-point cuts,” the former Reserve Bank board member wrote on The Conversation website.
“I think that’s a silly situation we got into with making such small adjustments.
“Monetary policy should be conducted with bigger adjustments, although 25-basis-point moves came in when I was on the board, back in 2000.
“There have been bigger changes, but they’ve tended to go towards a sequence of 25-point changes.
“They build up. You never see one of them – you see a sequence of them. I just don’t favour that strategy.
“As far as I can see the outlook here hasn’t changed much at all over the last couple of months, really,” Pagan says.
“And I don’t think the international situation is as bad as everyone thinks it is, but 25 basis points is not a response to that.
“If you really thought it was bad, you wouldn’t be doing 25, you’d be doing 50 or 75.
“Predicting negative outcomes for the international situation is a mug’s game. I don’t think anything much has changed. Mostly people are getting excited about Greek debt, and so on, but even if investors take 50% haircuts it’s not going to go away.
“Fundamentally I don’t see that Greece can stay in the Eurozone,” he says.
“I don’t think it’s going to have a major effect on economic activity, certainly not in Australia anyway.”
The professor argued the outlook for growth was “pretty good”.
“It’s not spectacular, but you wouldn’t be cutting rates because of that.
“And I don’t think you should be cutting rates because of an inflation outcome – it’s just one number.
“You might argue that they have put rates at the level they’ve been because they thought inflation was going to be stronger, so they’re just reversing a little bit.
“Then they’ll be in a position to raise them again if they have to later on,” he suggests.
