Phil Lowe in a speech just now:
I would now like to turn to monetary policy, where I will focus my remarks on our bond purchase program and the outlook for the cash rate.
First, though, I want to emphasise that the RBA’s package of monetary policy measures is providing ongoing and important support to the Australian economy as it deals with the Delta outbreak. This package includes:
- a record low cash rate
- a target of 10 basis points for the April 2024 Australian Government bond
- a bond purchase program under which we have already purchased $200 billion of government bonds, with more to come; and
- the low-cost term funding facility for Australia’s banks, under which $188 billion has been provided for 3 years.
This monetary policy package is working by: keeping funding costs and lending rates low across the economy; ensuring that the financial system is very liquid; supporting household and business balance sheets; and contributing to an exchange rate that is lower than it would be otherwise. It is through these transmission mechanisms that our policies are supporting, and will continue to support, the recovery of the Australian economy over the months ahead.
At the Reserve Bank Board meeting last week, we considered how the bond purchase program should evolve in response to the Delta outbreak and the change to the economic outlook. The conclusion was that we will purchase $4 billion of bonds each week, as previously announced, but that we will extend the period over which we do this until at least mid February next year.
This conclusion reflected a number of considerations.
The first and foremost is the delay in the economic recovery and the associated increase in uncertainty about the future. Given that the recovery has been delayed, we considered it appropriate that we delay any consideration of a further taper in our bond purchases until next year. By February we will know more about how the economy is responding to the easing of restrictions than we will know in November. We also took account of the fact that the delayed recovery means that it will take longer to achieve our inflation goals. Continuing with the bond purchases at the announced rate for a longer period will also provide some additional insurance against downside scenarios.
A second consideration the Board discussed was the appropriate roles of monetary policy and fiscal policy in response to the nature of the shock we are experiencing. This shock is largely the result of government efforts to contain the movement of people and economic activity. It is also expected to be only temporary, given the expected easing of containment measures over coming months.
Throughout the pandemic, the RBA has seen its role as being part of the national effort to build a bridge to the other side and make sure that the economy is well placed to rebound strongly when the time comes. As I discussed earlier, the package of policy measures introduced over the past year has helped build that bridge. Having already put that package in place, our assessment was that fiscal policy is the more effective policy instrument in responding to the Delta outbreak. This is because fiscal policy can use the public balance sheet to offset the hit to private incomes during the lockdowns. In contrast, monetary policy works mainly on the demand side and the effects on income are felt with a lag; realistically, there is little we can do to offset the hit to demand in the September and December quarters. This is the role of fiscal policy and indeed there has been a sizeable and welcome fiscal response.
A third and related issue we considered was that by continuing to purchase government bonds at the rate of $4 billion a week we will be adding to the support provided to the economy during the recovery phase. The evidence suggests that the expected stock of central bank bond purchases matters more than how many bonds the central bank buys each week. By February, our cumulative purchases under the bond purchase program will have amounted to $275 billion. We will hold around 35 per cent of the Australian Government bonds on issue and 18 per cent of the state and territory bonds. The RBA’s purchase program started later than that of most other central banks but recently has been expanding faster relative to the stock of bonds outstanding (Graph 9). This represents a substantial and ongoing degree of support to the economic recovery.
I would now like to turn to the more traditional part of our monetary policy package – that is, the setting of the cash rate.
As I have discussed on previous occasions, last year we moved to an approach under which actual inflation, rather than forecast inflation, plays the more central role in our cash rate decisions. In today’s low inflation world we do not want to run the risk that we increase the cash rate on the basis of a forecast that ultimately does not come to pass, leaving inflation stuck below the target band. We want to see actual results, not forecasted results, before we lift the cash rate. Once we do see these results, forecasts of inflation will again have a role to play. But we have to get there first.
In particular, the Board has said that it will not increase the cash rate until actual inflation is sustainably within the 2–3 per cent target range. It won’t be enough for inflation to just sneak across the 2 per cent line for a quarter or two. We want to see inflation around the middle of the target range and have reasonable confidence that inflation will not fall below the 2–3 per cent band again. Our judgement is that this condition for a lift in the cash rate will not be met before 2024.
Meeting this condition will require a tighter labour market than we have now. Our assessment is that wages will need to be growing by at least 3 per cent. We remain well short of this. Even in industries where there has been strong demand for labour, wage increases remain mostly modest. This assessment was confirmed by the latest reading of the Wage Price Index, which showed an increase of just 1.7 per cent over the year to the June quarter, with wages growth slower than this in the public sector (Graph 10).
Our judgement is that it will take some time for wage increases to lift to a rate that is consistent with achieving the inflation target. There is a lot of inertia in the wage-setting process and the experience of the past decade is unlikely to be reversed quickly. This inertia comes from among other things: multi-year employment contracts; a strong cost-control mindset of Australian business; and low and stable inflation expectations.
This judgement stands in contrast to the expected path of the cash rate implied by market pricing (Graph 11). The current OIS curve implies a cash rate of around 25 basis points by end of 2022, 60 basis points at the end of 2023 and close to 100 basis points at the end of 2024. These expectations are difficult to reconcile with the picture I just outlined and I find it difficult to understand why rate rises are being priced in next year or early 2023. While policy rates might be increased in other countries over this timeframe, our wage and inflation experience is quite different.
Finally, I would like to address the question of housing prices, as some analysts have suggested we might lift the cash rate to cool the property market. I want to be clear that this is not on our agenda. While it is true that higher interest rates would, all else equal, see lower housing prices, they would also mean fewer jobs and lower wages growth. This is a poor trade-off in the current circumstances.
That is not to say that there aren’t public policy issues to be addressed here. On the financial side, the issue is the sustainability of trends in household borrowing. We are continuing to watch this closely, with the Council of Financial Regulators discussing possible regulatory steps if lending standards deteriorate or credit growth accelerates too much.
More broadly, society-wide concerns about the level of housing prices are not best addressed through increasing interest rates and curbs on lending. While monetary policy is contributing to higher housing prices at the moment, the way to address these concerns is through the structural factors that influence the value of the land upon which our dwellings are built. The factors include: the design of our taxation and social security systems; planning and zoning restrictions; the type of dwellings that are built; and the nature of our transportation networks. These are all obviously areas outside the domain of monetary policy and the central bank.
Our job is to achieve the inflation target and support the return to full employment in Australia. The package of policy measures we have put in place has us on a path to do that. Delta is delaying progress, but it is not expected to derail our resilient economy.
Can’t be clearer than that but it didn’t have much impact on market pricing, which is pretty stupid.
Not only is the recovery going to be crappy and deflationary, the terms of trade crash will land on it in 2022, along with a resumption of the immigration slave trade.
Inflation has no chance.