AFR pundits need monetary policy schooling

Via Patrick Commins at the AFR:

Speaking at an Australian Business Economists’ event in Sydney, Westpac Institutional Bank boss Lyn Cobley wondered why the RBA was even entertaining the idea of implementing experimental policy measures in Australia, such as a quantitative easing (QE) program of the sort implemented in the United States, Europe, Britain and Japan.

…we are on the cusp of being sucked into a massive monetary policy experiment started by the Japanese and taken up with gusto by policymakers in Europe and Japan.

Nobody knows how it will all pan out. This is what we should be worried about.

We know exactly where it will lead. The question is do we want to go there? Higher asset prices and a lower AUD. Is this the ideal result? No.

Monetary policy is pretty basic. The cash rate is the sledghammer used for cyclical credit pulses. Macroprudential tools are for fine tuning where that credit goes.

Sadly for Commins he has had this backwards all year, along with just about everyone else at the AFR. The RBA was always going cut. It had no choice as global and local yields collapsed. The mistake was the AFR bashing APRA into easing lending standards as well.

The paper was doing the bank’s bidding, as usual, to deliver fattened margins and now credit growth too. Whereas the nation needed lower interest rates in line with global yields, but tightened macroprudential to contain credit misallocation and deliver a lower AUD.

Frankly, that this even needs explaining shows how debauched the system is.

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