What spooked the RBA?

More monetary drivel from the AFR yesterday:

Considerations on the strength of the Australian dollar and the significant drag on the economy because of Victoria’s lockdown were two key factors that influenced decisions on further monetary easing bias, the minutes reveal.

In the September minutes the RBA said:

Members recognised that the substantial, coordinated and unprecedented easing of fiscal and monetary policy in Australia was helping to sustain the economy through this difficult period. Members noted that public sector balance sheets in Australia were strong, which allowed for the provision of continued support. They considered it likely that fiscal and monetary support would be required for some time given the outlook for the economy and the labour market. The Board affirmed its commitment to supporting jobs, incomes and businesses in Australia. It agreed to maintain highly accommodative settings as long as required and to continue to consider how further monetary measures could support the recovery.

From yesterday’s minutes:

Members recognised that the substantial, coordinated and unprecedented easing of fiscal and monetary policy in Australia was helping to sustain the economy through the current period. Members noted that public sector balance sheets in Australia were strong, which allowed for the provision of continued support, with the Australian Government Budget for 2020/21 to be announced that evening. The Secretary to the Australian Treasury briefed members on the main features of the Budget. Members considered that fiscal and monetary support would be required for some time given the outlook for the economy and the prospect of high unemployment.

The Board discussed the case for additional monetary easing to support jobs and the overall economy. As in previous meetings, members discussed the options of reducing the targets for the cash rate and the 3-year yield towards zero, without going negative, and buying government bonds further along the yield curve. These options would have the effect of further easing financial conditions in Australia.

In considering the case for further monetary measures, members discussed monetary policy developments abroad and their implications for financial conditions in Australia, through the yield curve and the exchange rate. Members noted that the larger balance sheet expansions by other central banks relative to the Reserve Bank was contributing to lower sovereign yields in most other advanced economies than in Australia. Members discussed the implications of this for the Australian dollar exchange rate.

Members also discussed how much traction further monetary easing might obtain in terms of better economic outcomes. They recognised that some parts of the transmission of easier monetary policy had been impaired as a result of the restrictions on activity in parts of the economy. However, as the economy opens up, members considered it reasonable to expect that further monetary easing would gain more traction than had been the case earlier. Members also considered the effect of lower interest rates on community confidence and on those people who rely on interest income.

Members discussed the possible effect of further monetary easing on financial stability. A further easing would help to reduce financial stability risks by strengthening the economy and private sector balance sheets, thereby lowering the number of non-performing loans. This benefit would need to be weighed against any additional risks as investors search for yield in the low interest rate environment, including those resulting from higher leverage and higher asset prices, particularly in the housing market. On balance, the Board thought it likely that there were greater financial stability benefits from a stronger economy, while acknowledging that risks in asset markets had to be closely monitored.

The RBA knew about the VIC lockdown in September and didn’t think then it needed more easing. The AUD fell from Sep to Oct, easing monetary conditions.

The only two things that were new entering the minutes were attacks on the bank by Paul Keating and Peter Tulip. And the budget. Perhaps the former helped thaw the bank’s reactionary psychology. But the key, to my mind, is this. The bank went out of its way to tip us off that it had been briefed on the budget.

The Secretary to the Australian Treasury briefed members on the main features of the Budget. Members considered that fiscal and monetary support would be required for some time given the outlook for the economy and the prospect of high unemployment.

Unscrambled that says ‘there’s not enough fiscal so we’d better add some more monetary stimulus’.

Cutting a long story short, the RBA took one look at the Depressionberg Unstimulus, recognised a deflationary shocker, and threw out the monetary rule book.

David Llewellyn-Smith

Comments

  1. pfh007.comMEMBER

    More likely they believe the same self serving nonsense as the Federal Reserve of San Francisco.

    https://www.frbsf.org/our-district/press/presidents-speeches/mary-c-daly/2020/october/is-the-federal-reserve-contributing-to-economic-inequality/?utm_source=frbsf-home-refresh-leadership-and-events-large-title&utm_medium=frbsf&utm_campaign=president-content

    They know there is a problem but it is NOT their fault.

    “.. Over the past 40 years, the income of households near the bottom of the distribution—the 10th percentile—rose by about 20 percent. In contrast, households near the top of the distribution—the 90th percentile—saw their incomes rise by 66 percent.4

    These differences in returns have added up to more inequality. In 2019, the top 10 percent of adults in the United States took home almost half of the pretax income generated in the economy—nearly five times their share of population.5

    Looking at wealth, the disparities are even wider. About one-quarter of Americans have essentially no wealth—near zero or even a negative net worth.6 The remainder of households have some wealth, but this is quite unevenly distributed. At the end of 2019, the top 10 percent of American households owned nearly 70 percent of all wealth held in the United States…”

    No folks pumping up asset prices and peddling cheap debt has NOTHING to with it.

    That 40 years of rising inequality and 40 years of financial deregulation is just a coincidence.

    More of the same and full steam ahead!

    • Spot on reducing the return on debt held by the wealthy creditor class has nothing to do with it.

      • pfh007.comMEMBER

        Yes, the Central Banks have really made those wealthy folk pay through the nose haven’t they as they have watched the values of their assets shoot to the moon and the cost of credit from their banker mates to have asset punts has hit the floor.

        But then you have some graphs and upward sloping curves that tell you everything is fine don’t you?

  2. These institution collectively, believe their role is to mitigate any possible change to the status quo. But the status quo is unrecognizable from the 70’s due largely to this approach. This will require a political solution coz these nobs just don’t get it

  3. bcnich (gfy)MEMBER

    What “spooked” the RBA, it’s going to turn out to be a horror movie

    My feeling is they’ve got some idea of the international shock coming but I don’t believe they know the extent

    We are months away from a GFC moment, that’s going to come close to bringing down the global banking system, the AUST banks will not be in the same structure as now this time next year

    This crisis will be the biggest in the last 100 years, central banks will try to stop but they won’t be able to this time, central banks are now at their limits and won’t have the firepower to stop this one, the RBA will try but wont succeed

    All analysts I believe are saying that Australian property prices will rise next year, they will all be wrong and will change their forecast Q1 next year to falling prices, just like they all said in 2019 that prices would rise 5 to 10 to 15 to 20% in 2020 and they were all wrong.

    I’d even go as far as saying you’ll see Australian house prices open up in that Q1 Feb to Easter next year at least 10 to 20% lower

    Australian property prices are going to crash into rising interest rates next year that will be driven by an international shock much larger than the GFC

    Ps Happy asked me GFY, Reusa would live it, it has 2 distinct meanings
    “Good for you” & the other one on wiki

    • SupperannuationMEMBER

      Thanks for making me feel better bcnich. I was beginning to think things were going back to business as usual.

      • bcnich (gfy)MEMBER

        Super
        Things are not going back to any normal.
        We are now in times, that we have not seen before in history.
        If you lift the carpet, under all the government stimulus, printing, negative rates ….MMTQECCF what ever initials these politicians & regulators have created an absolute disaster. I am sorry but all this is just delaying the disaster not fixing it.
        This will be the worst crisis in more than 100 years

        No government nor central bank will be able to stop this crisis

        This is not going to end well !!!!!!

        We are staring straight into the eyes of GFC 2.0

        • What happens when the foreign capital leaves? Ask the BRCA which is bemoaning the reality. Have they never heard of QE? Nope, they know about it. But when your currency has all the appeal of used toilet paper …

          http://www.bcra.gob.ar/PoliticaMonetaria/Politica_Monetaria-i.asp#d

          This new shortage of foreign currency originated by the mid of last decade with the contraction of international prices of commodities, domestic weaknesses regarding industrial and technological policies, and a slowdown that the economy and trade started to exhibit at a global level. These limitations on foreign currency flows for trade purposes added to the loss of access to voluntary lending and new domestic capital flight given the vulnerability that originated from a foreign indebtedness process which was, without a doubt, unsustainable.

          http://www.worldgovernmentbonds.com/country-comparison/argentina-vs-australia/

          How would you like a 38% mortgage rate???

          Oh, that’s right – can never happen here ….

      • Rorke's DriftMEMBER

        Ronin, I think the flood of Fed money was to hold up markets until election. But how the hell can they still do that after and what motivation to do so. Trump presumably had Powells balls in a vice somehow, but election over thats it. Ive started buying BBUS bear fund eft.

  4. PaperRooDogMEMBER

    “Noted public sectorbalance sheets were strong” if only they realised the private balance sheet also mattered, as Keen, Vague &others have shown, as it’s the combined balance that really matters, so their public balance sheet is not as strong as they likely think.

  5. This is why the system seems totally stupid to me. Basically, the RBA just keeps on accomodating more and more stupid Government policy. Basically the government is able to get away with bad decisions because the RBA eases the path. Moral hazard?