Via Damien Boey at Credit Suisse:
Overnight, RBA Deputy Governor Debelle delivered a speech about climate change, and its implications for economic policy.
Some key points are as follows:
- Climate change affects the agricultural sector of the economy. While agriculture is becoming less significant from a GDP perspective, food prices are still a major driver of CPI inflation.
- Increased renewable energy spending is a trend that is likely to occur across private and public sector spaces.
- Climate change in China will shape the demand for Australian liquefied natural gas (LNG) exports as a cleaner alternative to coal.
It is natural to ask why a central banker is talking about climate change in the first place, given that it is a politically heated topic in Australia. And we have a few theories about what is really happening:
- Fiscal policy under an ALP government is heavily focused on renewable energy capex (at least $15 billion to be spent over 10 years). In our recent article “Will democracy keep the cycle honest?” dated 14 February 2019, we explained why a new government will need to launch fiscal stimulus to combat the housing de-leveraging cycle in train. We also proposed that greater engagement between the RBA and fiscal policy makers would be a key cog in re-building credibility and restoring confidence after the event of an election. Viewed in this context, perhaps Debelle is opening the dialogue that needs to occur.
- As rates approach zero in Australia longer-term (ie not necessarily this cycle), the RBA will lose political relevance from a rate-setting perspective. Indeed, quantitative easing proposals being discussed are unlikely to work very well given that mortgages are priced off the short-end of the curve rather than the long-end. There is more hope in balance sheet expansion to target or cap the currency – but this discussion is not happening, as it would take the system back to the pre-float era. In lieu of longer-term irrelevance of the cash rate, it makes sense that the RBA establish its seat at the discussion table as an advisor on resource allocation in the economy.
- Policy makers are increasingly in search of alternative measures of social well-being going beyond GDP. Environmental considerations are becoming increasingly important – so much so, that they may even shape resource allocation. Indeed, they already are in China.
Money markets are now pricing in roughly an 80% chance of 2 rate cuts this year. Clearly, the RBA does not want to go quietly into the night, and has made it clear that if it cuts, it will be dragged kicking and screaming over the easing line. The trouble is that transmission is severely impaired in Australia. RBA rate cuts are unlikely to be fully passed through. Indeed, there is at least 60bps worth of spread widening between mortgage and cash rates baked in. And growth is slowing sharply in non-mining sectors. The risk is that without adequate fiscal easing, the RBA will have to cut much more than twice, even though rate cuts arguably are not as effective as they once were. And this is where we think Debelle is drawing out attention to other factors, such as fiscal easing via renewable energy spending, and external easing via an increase in the energy trade balance.
For what it is worth, we think Debelle is absolutely right to highlight these future positives. At some point, fiscal policy makers will come to the rescue of monetary policy makers. But not yet. Rates have a lot more room to fall in the short term.