Wednesday 31 July 2019

Central Banks and Inflation

Since the GFC we have seen Central Banks essentially powerless in attempting to 'rev up' the economy and thus boost inflation.

Indeed I think we have the confirmation of former RBA Governor Glenn Stevens proposition that reducing interest rates beyond a certain figure is pointless.

monetary policy is increasingly looking impotent with Central Banks increasingly looking to quick to either put up rates or say the next thing for rates is for them to go up. the Fed last night embarrassingly cut rates as their forecasts have proved wrong. the RBA here has also proved to be way too optimistic of economic growth and rising inflation.

This leads to the obvious question of what Central Banks can do?

At some point , let us call it 3% in Australia the Central Bank should say to the government of the day you need to increase infrastructure spending to kick start the economy. In our case the RBA Governor should sat those projects should be only from the 34 o projects ready to go that are on Infrastructure Australia's list. The present government has only @ projects that they are presently spending money on from that list.

The other thing that appears to be needing to be done is to actually re-regulate the industrial relations system so unions can get wages to rise again.

Wages need to rise for inflation to rise.

Let us add in a caveat .Central Banks should wait until they are quite sure that inflation is on the rise. Maybe wait until inflation on an underlying basis reaches 4% before raising interest rates. No need to  be premature about inflation until it occurs me thinks.

I should add reducing interest rates when they are low merely boosts assets prices rather economic activity

Austan Goolsbee  why rate cuts are not helpful

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