Recalcitrant McKibbin spouts RBA fake news

Front page at The Australian over the weekend:

Booming share prices, record household debt and a resurgent property market are increasing pressure on the Reserve Bank to hold fire on further interest rate cuts, despite the economy absorbing a hit from the bushfire crisis, which has rocked the agricultural and tourism sectors.

…Former RBA board member and Australian National University professor Warwick McKibbin said the central bank should hold fire, pointing to evidence that near-zero and falling rates were starting to scare people.

“Once rates get to a certain level, the effects start to disappear quickly. There’s a balance between­ cheaper credit and making people concerned that there is a serious problem. There are much better policies to stimulate growth than cutting rates.”

…Professor McKibbin said, over time, persistently low rates created “a great deal of problems with the build-up of debt and the distortion of companies’ and households’ balance sheets”.

Who could possibly disagree with that?

The problem is Professor McKibbin is continuing his bizarre campaign to never mention the words “macro” and “prudential”. He has done this for years as the macroprudential tool kit available to global central banks has dramatically expanded and been endorsed by every major economic entity. Eventually it even landed in Australia and was deployed successfully to end the last housing boom. Which ushered in a very worthwhile period of deleveraging without triggering a recession, a truly rare experience in macro economic management.

The entire article, by Patrick Commins, is very poor journalism for the same reason. At no point does it interview anybody that holds a counter-argument. It just rounds up the usual suspects that have failed to move with the times and mentions neither macroprudential nor APRA, its manager. This is monetary policy fake news.

So, let’s have the debate here instead. What would happen if the RBA stopped cutting today:

  • We are in a period of hysterical market reflation so the Australian dollar would fly. The last comparable period was 2016 when it shot up to 80 cents.
  • This would crush nominal growth, hammer the Budget and send a shock through the external sector, especially tourism and education.
  • Inflation would crater to 1% and wages growth fall further, lifting the debt burden for all.
  • The share market mini-bubble would pop. The construction bust would get worse.
  • It might force the Morrison Government to spend which is a good idea. Or not. It is ideologically driven.
  • If confidence did lift on no cuts, as the McKibbin argument implies, then households will…err…go and borrow more, house prices might accelerate!

Versus the alternative of rate cuts with macroprudential tightening:

  • The Australian dollar will keep falling to 65 cents this year supporting the external sector, Budget repair, nominal growth and inflation.
  • The sharemarket mini-bubble is harmless. It’s not being driven by corporate borrowing or margin debt. It’s savings poured in owing the high equity risk premium. If it pops it will have little impact on financial stability.
  • Fiscal spending is needed regardless.
  • If confidence is damaged then lower rates will accelerate deleveraging. Hooray!
  • House price gains will fade while Australia keeps growing and avoids a high unemployment debt-deflation. What Ray Dalio calls a beautiful deleveraging, in other words.

In short, Professor McKibbin’s argument is not only dangerously blinkered, it actually makes no logical sense. If rate cuts are damaging confidence then they are also aiding deleveraging. Lower rates also accelerate repayments to prevent the houshold debt load from growing. Indeed, despite the mortgage rebound, the debt ratios are trending lower. Guess since when? The advent of macroprudential in 2015!

There is a problem with macroprudential in-so-far-as it is operated under the aegis of APRA not the RBA. The two should be banged back together in the mold of the far superio RBNZ to ensure appropriate accountability.  But that doesn’t mean macroprudential doesn’t hasn’t worked via the Council of Financial Regulators. It has, even if used too lsowly.

Professor McKibbin is right to worry about any further house price and household debt rebound but it’s time he joined the modern world and attacked APRA for loosening too far, not the RBA.

Latest posts by David Llewellyn-Smith (see all)


  1. Meh, cutting now won’t help the economy. It hasn’t helped anywhere else. All I see is rampant asset price inflation, stagnant wages and unaffordable housing. In my opinion cutting again is just more madness. And QE is bat Shyte crazy. But we must protect asset owners at all costs. Screw savers. They had it coming , what with their silly prudence and all.

    • happy valleyMEMBER

      And what’s more screwing savers and fixed interest income reliant retirees brings great satisfaction to the the RBA happy clappy angels of death?

    • +1
      People are beginning to see the light wrt to this ludicrous economic-model-adherence i.e. economy slows, lower rates (but counteract it with MPLOL). Lowering rates ad infinitum is disastrous for both savers and the economy because all actors, citizens and business people alike, become alarmed at ‘historically lowest’ rates and naturally become more cautious – not the opposite, which is what lower rates is meant to lead to (i.e. ‘animal spirits’ – yes, that is in the modern economic playbook).

      Historians will look at this episode and think: how were the human race so fcking stupid. Assuming we all survive 😉

  2. What type of MP would be appropriate under the current scenario? It’s not investors that have reflated the bubble, it is FHBs and OOs. Lower IRs are not encouraging businesses to invest but it’s probably keeping a few zombies afloat. I suspect it’s our trade balance keeping the $Aus inflated rather than our interest rates.

  3. Let’s see what this Thursday’s employment lottery and the CPI (Q4) bring.

    I was firmly in the rate cut camp for two years but I can see the rationale for holding back, for now, for the following reasons:
    1. If the AIG and NaB surveys remain stable, then employment will expand in the region of 2.5%y/y this year, and assuming participation is stable, that sends unemployment lower,
    2. CPI inflation is below target but a lift in food and energy prices and a modest lift in housing related costs could see it too lift, back towards 2%.
    3. Monetary and credit conditions have already eased significantly as has fiscal policy and the terms of trade remain elevated so there’s plenty of stimulus in the pipe
    4. The RBA has only two bullets left – in their opinion – before having to resort to QE (which they won’t want to do)
    5. House prices have been surging, CAGR well in excess of 10%pa and the ASX has also lifted.
    6. There seems to be mass hysteria around the bush fires. We simply don’t know what impact that will have on the economy – maybe it’s a lot, maybe it’s not – but it’s probably prudent to wait a few weeks before panicking.

    So the Bank can hold off in February, issue a dovish Statement and SoMP – the A$ won’t fly – and then re-assess in the autumn…

    Why the panic?

    • Who’s panicking? Why don’t you mention APRA and MP either? Two cuts is irrelevent to their store of ammo long term. QE is inevitable whether they like it or not.

      You have an economy operating at stall speed undergoing a large internal shock, some of which will linger and very likely not be offset by recon. Fiscal is not coming to the rescue regardless of high Tot meanign weak wages. The currency is rising like it or not. Un and under employment are trending up thanks to a large contruction bust with at least a year to run. Inflation is nowhere and a few food spikes are irrelevent and offset by the tourism smash anyway.

      Why not cut? They’ll barely be passed on but will lower currency.

      If it aids deleveraging as well then that’s all to the good.

        • HNH didn’t include a third option. Considering there will be no macroprudential tightening, does HNH still advocate further rate cutting(without macroprudential)?

      • Well, given what the Bank has been saying, and the shorter term dynamics of activity, inflation and the labour market, there’s no urgency to do it at this meeting. Maybe the employment report or CPI delivers a smoking gun, but for now I don’t see any urgency.

  4. The central banks have organised extremely low interest rates so that governments can borrow more and more money.
    The Australian Federal Government now has A$754,000,000,000 debt and are unable to to come up with a surplus to pay even a token of A$1,000,000,000 against it.Meanwhile they are adding A$20,000,000,000 in interest each year
    Governments around the world no longer have the means or the intent to pay down their debt due to extremely low interest rates.

    I thank God that I bought a house at a time when interest rates were 13.5% because that put a big cap on how much you could borrow, preventing houses rising to ridiculous prices.

    Eventually current debt levels will cause hyperinflation and that can only be tamed by high interest rates.

      • The only way forward is to keep expanding credit.
        Who wants to tell people that we’ll need 25 years of austerity to fix the problem?

        “There is no means of avoiding the final collapse of a boom brought about by credit expansion.The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
        — Ludwig von Mises

      • “How would MMT be implemented and what would be the economic implications? The process would be something like this: The Treasury would issue zero maturity and zero interest rate liabilities to the Fed, who in turn, would increase the Treasury’s balances at the Federal Reserve Banks. The Treasury, in turn, could spend these deposits directly to pay for programs, personnel, etc. Thus, the Fed, which is part of the government, would be funding its parent with a worthless IOU. In historical cases of money printing, the countries were not the reserve currency of the world, as the U.S. is today. Thus, the entire global system could be destabilized in very short order if this were to occur.
        There would be no real increase in services or money since very little time would lapse before people realized increasing inflation was not increasing real purchasing power. If the government responded by issuing more central bank legal tender, the inflationary process would become self-perpetuating, and as was the case in numerous historical instances this would lead to hyper-inflation. Moreover, the central bank would have no capability of reducing the money supply. All they could offer would be the zero maturity, zero interest liabilities of the government, but there would be no buyers. This would mean that hyper-inflation would be difficult to stop.”
        —-Van R. Hoisington & Lacey H.Hunt, Ph.D.
        Hoisington Quarterly Review, First Quarter 2019

  5. Shock horror, mock horror, I’m pro Gittins on this one, “RBA should stop pretending there is any more it can usefully do”.

    • You’ll be amazed at what central bankers think they can do – in fact, I can’t recall a moment when they’d run out of ideas?

      Pardon me: curing cancer is where they draw the line.

      Nearly a million dollars of YOUR money per head being paid to a committee of useless c*nts. Swallow that, peasants.