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.