RBA overcut on interest rates - Eslake
(25 May 2015 – Australia) Bank of America Merrill Lynch chief economist Saul Eslake has warned the Reserve Bank of Australia (RBA) may have made serious errors in setting interest rates.
Eslake told ABC’s AM program the central bank’s mistake in growth assumptions could lead to further cuts in interest rates which could overstimulate the already booming property market.
"They base their forecasts on an assumption that the exchange rate will remain unchanged, even though almost in the same breath they say that a fall in the exchange rate is not only desirable, as they've been saying for many years, but also likely," Eslake explained.
"That means that, all else being equal, they get weaker forecasts for economic growth and lower forecasts for inflation than they would if they put into their models what they think the exchange rate is actually likely to do.
"They then make decisions about monetary policy, interest rates, based on the forecasts that have assumed the exchange rate will remain unchanged.
"And, in my view, that's potentially leading them into a policy mistake where they cut interest rates on the basis of forecasts that don't reflect what they believe will happen to the exchange rate," Eslake said.
He said the RBA may have already cut interest rates more than the economic outlook required.
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