Lunatic RBA hearts the depression

This is late. There is no need to be in a hurry now that the RBA has rendered itself entirely irrelevant:

At its meeting today, the Board decided to maintain the current policy settings, including the targets for the cash rate and the yield on 3-year Australian Government bonds of 25 basis points.

The global economy is experiencing a severe contraction as countries seek to contain the coronavirus. Even though the worst of this contraction has now passed, the outlook remains highly uncertain. The recovery is expected to be only gradual and its shape is dependent on containment of the virus. While infection rates have declined in some countries, they are still very high and rising in others. International trade remains weak, although there has been a strong recovery in industrial activity in China over recent months.

Globally, conditions in financial markets remain accommodative. Volatility has declined and there have been large raisings of both debt and equity. The prices of many assets have risen substantially despite the high level of uncertainty about the economic outlook. Bond yields remain at historically low levels.

The Bank’s mid-March package of support for the Australian economy is working as expected. There is a very high level of liquidity in the Australian financial system and borrowing rates are at historical lows. Authorised deposit-taking institutions are continuing to draw on the Term Funding Facility, with total drawings to date of around $29 billion. Further use of this facility is expected over coming months.

Government bond markets are functioning normally alongside a significant increase in issuance. The yield on 3-year Australian Government Securities (AGS) has been consistent with the target of around 25 basis points. The yield has, however, been a little higher than 25 basis points over recent weeks. Given this, tomorrow the Bank will purchase AGS in the secondary market to ensure that the yield on 3-year bonds remains consistent with the target. Further purchases will be undertaken as necessary. The yield target will remain in place until progress is being made towards the goals for full employment and inflation.

The Australian economy is going through a very difficult period and is experiencing the biggest contraction since the 1930s. As difficult as this is, the downturn is not as severe as earlier expected and a recovery is now underway in most of Australia. This recovery is, however, likely to be both uneven and bumpy, with the coronavirus outbreak in Victoria having a major effect on the Victorian economy. Given the uncertainties about the overall outlook, the Board considered a range of scenarios at its meeting. In the baseline scenario, output falls by 6 per cent over 2020 and then grows by 5 per cent over the following year. In this scenario, the unemployment rate rises to around 10 per cent later in 2020 due to further job losses in Victoria and more people elsewhere in Australia looking for jobs. Over the following couple of years, the unemployment rate is expected to decline gradually to around 7 per cent.

The Board also considered other scenarios. A stronger recovery is possible if progress is made in containing the virus in the near future. This progress would support an improvement in confidence and a less cautious approach by households and businesses to their spending. On the other hand, if Australia and other countries were to experience further widespread lockdowns, the recovery in both output and the labour market would be delayed. Details on these scenarios will be provided in the Statement on Monetary Policy on 7 August.

In each of the scenarios considered by the Board, inflation remains below 2 per cent over the next couple of years. In the most recent quarter, CPI inflation fell to –0.3 per cent in year-ended terms, reflecting lower oil prices and the effects of various policy measures, including the decisions to make child care and some pre-school free for a period. Inflation is expected to return to positive territory in the current quarter. Beyond that, given the ongoing spare capacity in the economy, inflation is expected to average between 1 and 1½ per cent over the next couple of years.

As Australians deal with the coronavirus, the economy is being supported by the substantial, coordinated and unprecedented easing of fiscal and monetary policy. The Australian Government’s recent announcement that various income support measures will be extended is a welcome development and will support aggregate demand. It is likely that fiscal and monetary stimulus will be required for some time given the outlook for the economy and the labour market.

The Board is committed to do what it can to support jobs, incomes and businesses in Australia. Its actions are keeping funding costs low and assisting with the supply of credit to households and businesses. This accommodative approach will be maintained as long as it is required. The Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band.

So, the muppets have unilaterally changed their mandate to 1% inflation. High unemployment will be the result as far as the eye can see. Why is the bank even using a corrupt unemployment rate that long ago lost its connection to inflation. It should be using the depression-level underemployment rate which tracks inflation perfectly.

Sack Phil Lowe. He has no right to behave in this way amid a once per century depression and has all kinds of options to accelerate recovery from:

  • addressing QE at carry traders;
  • Operation Twist to crush the long bond;
  • embrace MMT intellectually to intensify pressure on a retrograde trickle-down government;
  • negative interest rates;
  • combine with APRA for QE plus macroprudential.

None of these needs blow asset bubbles, can push liquidity and income into households, can lift productivity, can aid deleveraging, can lower the AUD, and can generate jobs and inflation.

Why are we paying this dill one million dollars, not to mention 1400 other buffoons, to sit on their collective arses and collect a sinecure as the nation suffers through a once-per-century shock?

David Llewellyn-Smith
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    • Strange EconomicsMEMBER

      They deserve every cent. Anyway their mortgages are probably 2 million each so they need house price growth too.
      No mere mortal on the average wage could rationaliee doing nothing for the last 3 years or the next 3.
      No mere graduate economist on a graduate salary could ignore the under-employment rate in their estimates.
      It takes experience and connections to understand this.

      Or perhaps some costcutting in the best traditions and replace them with a new graduate on 60K a year?

  1. Aussies Can't Socially Distance

    No more stimulus there’s enough sloshing around between JobKeeper, JobSeeker, $20k out of super. Retail going gangbusters in most of the country.

    The issue in Victoria is that no-one can leave their homes and can’t spend money. No amount of stimulus will change that.

    • Don’t forget the 2 $750 payments, mortgage deferrals, the new $1500 for migrants to self isolate, FHB bribes, and 25k for renos. Probably some more things I’ve missed there.

  2. Great article.

    As for the RBA: “the worst of this contraction has now passed”. Says who? Victoria? Absolute bullsh!t from start to finish. Insolvencies and job losses are only getting worse from here.

  3. DingwallMEMBER

    ” …then grows by 5 per cent over the following year.”
    Meanwhile, no tourists, no international students, CBD’s and all associated services decimated as people work from home.permanently, etc etc etc ………….. yet the “economy” will bounce back nicely.

    • That’s what you get when you rely on models based on faulty economic theory — it ain’t rocket science.

      If just one of them came down from their ivory tower and walked the streets …

  4. Mining BoganMEMBER

    One must realise that in Straya, just remembering what day it is has one considered genius.

    Understand that fact and everything else makes perfect sense.

  5. “nothing to see here, please disburse, nothing to see here”

    Nope, not Lt Frank Drebbin, it’s our own clumsy public servant, Phil the Shill….

  6. The government support package is unsustainable, as is the mortgage holiday. Which means eventually they will cease. And when they do, the true state of the economic disaster will become apparent to all.

    • I’m not so sure, mate. I think Scummo and Phil will fall in behind the US and print like crazy. Granted, it could take them a while to be stung into action but what other choice do they have. Whether you oppose it ideologically or not MMT is already on deck in the US and it will be on deck here soon too. It may take the AUD to scream to 0.80 (and beyond) first though.

    • Jumping jack flash

      Yeah nah, they can keep this up all day.
      Government debt before the virus was a very modest 0.5 trillion. The people’s debt was around 2.4, or a bit less than 5 times that.

      We have seen some huge falls in the people’s debt, but some massive gains by the government. As it should be. But if only this money was put to good use! Instead it is basically used to bail out the banks… Eventually.

  7. I agree with all the above except that it won’t blow asset prices higher. Negative rates will do exactly that.

  8. Maybe if we had waited for like….you know… a real emergency…. like now, the RBA would have had some room to move. Nah, MB shows its John Howard roots by always seeing low rates as the be all and end all. Low rates, not Daniel Andrews is why the economy is getting smashed now.

  9. PalimpsestMEMBER

    I notice your comment that the posting was late, because there really is nothing to see here. I remember the days when I hung off every meeting. Therefore I am (only slightly) embarrassed to admit that I completely forgot they were meeting today. A sad slow progress towards irrelevance, except central Banks are really, really important.Just perhaps not all of them.

    The only way I can make sense of this is that they are pressuring the Government to act with more stimulus, by doing nothing further themselves. A passive aggressive response.

    • Even before Covid, the RBA had been signalling there was nothing more they could do and the government needed to start the fiscal pump. They are probably pleased that the government is finally acting.

  10. DLS, you’re really not a fan of free markets, price discovery or a rational monetary system are you. I admit it’s a nasty time now to commit to such things but if not reset now, then when? Do we really want to continue down the path to monetary fantasy land from here? I mean, what this path has brought us so far is so demented that it’s the reason macrobusiness even exists, no?

    • Love ’em all. But you can’t commit to them when nobody else does. That’s currency suicide. What you can do is manage the fallout better than they do.

      That’s my biggest fear. We will delay, delay then panic and have a mass conversion to MMT Jesus followed by the Government buying real estate.

    • UpperWestsideMEMBER

      Australia is really only average on the OECD incompetence index, we need to try harder.