The RBA has finally made it to where it should have been ten years ago:
Turning to the broader policy question, we have been considering what more we can do to support jobs, incomes and businesses in Australia to help build that important road to the recovery. The options have been laid out in previous speeches by the Deputy Governor and myself and I don’t plan to elaborate on these again today.[1] While the Board has not yet made any decisions, I thought it might be useful to close today by highlighting three of the many issues we are working through.
The first is how much traction any further monetary easing might get in terms of better economic outcomes. When the pandemic was at its worst and there were severe restrictions on activity we judged that there was little to be gained from further monetary easing. The solutions to the problems the country faced lay elsewhere. As the economy opens up, though, it is reasonable to expect that further monetary easing would get more traction than was the case earlier.
A second issue is the possible effect of further monetary easing on financial stability and longer-term macroeconomic stability. This is an issue that we have paid close attention to in the past when we were considering reducing interest rates in a relatively robust economic environment. It remains an important issue today, but the considerations have changed somewhat. To the extent that an easing of monetary policy helps people get jobs it will help private sector balance sheets and lessen the number of problem loans. In so doing, it can reduce financial stability risks. This benefit needs to be weighed against any additional risks as people take more investment risk in the search for yield. We also need to take into account the effect of low interest rates on people who rely on interest income.
A third issue is what is happening internationally with monetary policy. Australia is a mid-sized open economy in an interconnected world, so what happens abroad has an impact here on both our exchange rate and our yield curve. In the past, the interest differentials provided a reasonable gauge to the relative stance of monetary policy across countries. Today, things are not so straightforward, with monetary policy also working through balance sheet expansion. As I noted earlier, our balance sheet has increased considerably since March, but larger increases have occurred in other countries. We are considering the implications of this as we work through our own options.
In short:
- First, the bank is ready to cut deeper. For now, it’s to 0.1% but soon enough it will be negative rates.
- Second, the bank will have to co-operate with ARPA on financial stability though it will be a long time before the latter tightens, sadly.
- Third, the bank is going to print and roll out the bond curve to crush yields and the Australian dollar carry trade.
Here’s what the economics fraternity said leading into Phil Lowe’s speech at the always monetary reactionary AFR:
“Compared to prior downturns, the recovery in consumer sentiment is the sharpest seen in the history of the series and underlies the particular nature of this shock,” NAB economists said.
Citi, Morgan Stanley and Deutsche Bank are among the economists who now think a rate cut is questionable.
“I expect that Lowe will push back on pricing a November rate cut in his speech on Thursday,” Deutsche Bank’s Philip O’donaghoe said. “It will be very important if he doesn’t push back.
Citi’s Josh Williamson said last week’s upgrades to economic forecasts by Treasury meant the RBA would soon follow with an upgrade and that also calls into question the need for a rate cut in November.
Morgan Stanley’s Chris Read said in a note to clients last week that COVID-19 restrictions would also play into RBA policy, making “further easing this year less likely”, particularly after a stimulatory federal budget.
BetaShares chief economist David Bassanese has said the strong near-term fiscal stimulus provided in the federal budget could reduce the chances of the RBA cutting interest rates.
Other economists including Professor Warren Hogan and former RBA governor Ian Macfarlane have also warned against cutting next month.
Instead, Phil Lowe gave the most dovish speech of his life. How did they all get it all so wrong?
- First, the AFR encourages any and all retrograde monetary policy discussions to protect its big advertisers, the banks.
- Second, they read each other’s stuff and hug the median opinion index instead of thinking for themselves.
- Third, they have totally misread the budget as stimulatory while the RBA clearly has not.
Which is just as well because it sure as hell wasn’t. The budget was a bizarre experiment in trickle-down economics that somehow conceived enormous deficits without providing any stimulus. The embrace of the budget by the AFR and its phalanx of monetary dills is all the more ironic given it is they that have been so hawkish on rates to force the government to boost fiscal.
This points to the fourth and final failure of the economists. Putting the budget into historical and intellectual context, which exposed it as both heretical and ill-targeted, was completely overlooked for a few headline deficits.
That just about sums up everything that is wrong with economics and economists today.
