It’s not quite wall-to-wall RBA drivel but it’s close. The AFR is a monetary swamp, as usual. First up is a waffling Richard Holden:
The Reserve Bank of Australia did exactly as it signalled and markets expected by cutting the cash rate to 0.1 per cent and expanding its bond-buying program on Tuesday.
Now that the RBA is getting very close to having no ammunition left it’s a good time to reflect on what the bank can achieve, and, more importantly, what we should expect from it.
That is what central bankers can do – they can inject liquidity to avoid massive economic downturns from bank failures or a collapse in aggregate demand. This was most notably on display during the 2008 financial crisis when the US Fed and the RBA acted quickly and decisively.
And central bankers also have a hugely important role to play in anchoring long-run inflation expectations – which ended the self-fulfilling prophecies of wage-price spirals from the 1970s.
When they have a lot of room to cut rates, central bankers have big guns, even if right now they’re armed with little more than a slingshot.
Rubbish. The next steps for the RBA make the point. If it is out of ammo then how come it is going to:
- Fund the federal government to the ends of the earth with QE.
- Cut mortgage rates to somewhere under 1% as it directly funds cheap mortgages via the TFF.
- Followed by paying banks to lend as the TFF rate turns negative.
- Buy more and more state government debt to keep the infrastructure build going.
There is an entire cycle of stimulus left in this ammunition chamber.
Then, when that’s done, and the RBA follows international trends, it will fund MMT to ends of the earth as well. Eventually, this will lift interest rates and refill the conventional ammunition chamber.
The RBA is not out of ammo. It’s only just getting started firing its real weapons. Warren Hogan has the right idea:
Now that the RBA has entered the global currency war in earnest, the real question is whether it will be bullied into negative rates by financial markets and the highly mobile capital that underpins those markets.
Lowe insists that this is still ‘‘extraordinarily unlikely’’. He hinted at the conditions required for negative rates – if the world’s major central banks are doing it.
Given that a couple of them already are, it appears negative rates in Australia may not be as unlikely as Lowe seems to think.
Oh yes. Next up, John Kehoe:
[Lowe] insists the RBA is not propping up government spending.
…Financial market consultant and former Treasury official Geoff Weir believes it is a bit semantic whether the RBA is directly buying government bonds or making purchases in the secondary market.
…“By adding a program of government bond buying not tied to a target for the government bond yield, the RBA have moved a step closer to acknowledging that they were already engaged in monetary financing of the deficit,” Weir says.
Of course it is funding the government but it has to keep the monetary troglodytes at the AFR at bay so the RBA is playing a rhetorical game.
Louis Christopher fears the bubble:
“What the RBA’s intention is, is that they would like to see a recovering housing market and I think they are going to get it,” SQM Research’s Louis Christopher said.
“Yes, it does risk creating too much fuel for the housing market.
“We are at a significant risk of a new housing bubble. The economy is in recession, or coming out of one. There is going to be a cost here. Eventually we are going to see unaffordable housing.”
Yep, though I still think the SE is buggered. Yet, if we’re worried about it then APRA is now responsible not the RBA. We are an interest-rate price taker not maker in the world. The RBA cannot allow the currency to inflate as the economy dies, especially as we decouple from China, which means it had no choice on any of this easing.
Which brings us to the stupid in Robert Guy:
In a world of big swinging central bank balance sheets, the Reserve Bank of Australia’s commitment to a $100 billion program of quantitative easing looks a little diminutive.
Looking more pea-shooter than bazooka, the RBA’s plan to buy $5 billion of Australian Commonwealth government and state government bonds a week over the next six months is dwarfed by the big ticket programs embraced by central bank top dogs such as the US Federal Reserve and European Central Bank.
Australia is not the first small open economy that has resorted to unconventional policy to try to engineer a weaker currency, even if it is not the main priority.
The Swiss National Bank capped the franc’s value against the euro in 2011 (it eventually relented in 2015) and embraced negative rates on bank reserves to dampen the currency’s overvaluation. Similarly, Sweden’s Riksbank cut its repo rate to negative 0.1 per cent in 2015 and started buying bonds.
Meh, and it’s supposed to do nothing then is it? To allow a yield and quantitative spread to open up and drive the AUD higher to hollow us out even as we decouple from China? QE is more art than science but the RBA has clearly weighed in against the currency and that has already had a material impact.
Super stupid goes, as usual, to the AFR editorial:
The pity is that, unlike the central bank, Australia’s political process pays so little genuine regard for the jobless. As former Treasury secretary Ted Evans once said, Australians choose the unemployment rate they are prepared to tolerate according to the structural policies they are willing to pursue.
Before the central bank steers monetary policy into such uncertain territory, why aren’t other arms of policy being mobilised to deal with this, such as industrial relations and tax reform to make it easier to work, invest and hire to assist the recovery?
…But as former Reserve Bank board member Bob Gregory told this newspaper on the weekend, not only are there no guarantees that unconventional monetary policy will work, but there is also great uncertainty about what the side effects might be.
Rubbish. Asset prices up until APRA intervenes which is a long way off. Currency lower than otherwise. The inexorable slide into Japanese stagnation and banking zombies until MMT arrives and drives interest rates higher. The path is entirely clear for those unencumbered by ideology.
Don’t get me wrong. Nobody here is arguing that the system makes sense. But you can’t sit it out on a point of principle or you die of currency inflation anyway, especially as Chinese decoupling transpires. We are an interest rate price take not maker.
Let’s give the last word to Paul Keating:
Former Labor treasurer and prime minister Paul Keating said the bank had arisen from its “monetary slumber” and its “long, fruitless search for the inflation dragon”.
He accused the bank of running monetary policy too tightly for the past five years, with its package of changes on Tuesday aimed at undoing that damage.
“This, no doubt, is designed to take pressure off the exchange rate, which overvalued, has cost thousands of jobs and diminished competitiveness over the last five to seven years,” Mr Keating said. “The bank’s inflation obsession should be moderated by a switch to ‘actual’ and not ‘forecast’ inflation, which the bank has been so wedded to.”
Expect MOAR. Much, much MOAR.
