The RBA was right to cut rates this month, says Standard Life Investment's (SLI) chief economist – but it will take more than monetary policy to revive Australia's flagging economy.
Speaking to InvestorDaily, SLI's Jeremy Lawson said he wasn't surprised by the RBA's decision to cut the official cash rate by 25 basis points to 2.25 per cent on 3 February.
The income side of the December 2014 quarter national accounts was "particularly weak" and living standards in Australia are effectively falling, he said.
"The rebalancing of the economy that the RBA’s been trying to achieve through easing monetary policy has only been partially successful," Mr Lawson said.
While the housing market has been doing very well, non-mining business investment is still very weak, he said.
On the resources front, mining companies have a strong incentive to cut investment as commodity prices continue to fall, Mr Lawson said.
"[Mining companies] are trying to demonstrate to markets that they’re disciplined, and they don’t want to cut dividends or signal that profits are going to be too weak," he said.
Australia has a tricky balancing act ahead of it as mining investment comes off as other parts of the economy – notably housing – are accelerating, Mr Lawson said.
"There is only so much that monetary policy can do about it, and I think that’s one of the critical things in Australia at the moment," he said.
"We’ve reached that point where it’s right for the RBA to be easing policy, but a lot of Australia's problems – the reasons for weaker business investment and weaker productivity – are related to government policy," Mr Lawson said.
But given the recent turmoil in Canberra, "hopes on that front are somewhat limited", he said.
Monetary policy cannot, for example, stimulate mining investment, he said.
While a resources company will certainly take its borrowing costs into account when it is considering a five to 10 year investment, the regulatory and tax environments are just as important, Mr Lawson said.
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