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THE LATEST FROM THE KOUK
“Bitterly disappointing”: We are seeing a once in a generation policy failure
Thu, 12 Sep 2019
This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/rba-interest-rates-government-can-stimulate-economy-but-wont-210050650.html
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“Bitterly disappointing”: We are seeing a once in a generation policy failure
Imagine having the power to promote economic growth, lower the unemployment rate and set in train the conditions to boost real wages growth and inflation?
It would be immensely satisfying to change policies to improve the living standards and quality of life for every day, hard-working Australians and their families.
Wouldn’t it?
Next imagine a harsh reality where economic growth is weak and slowing, the unemployment rate is rising and wages growth and inflation well below a satisfactory level, and you choose not to wield the power reverse these uncomfortable circumstances?
Doing nothing, unwilling to pump some much needed cash into the economy because of a political dogma wedded to a notion that budget surpluses are good and that holding interest rates unnecessarily high so you might dampen demand for houses – which is seen as a problem - and household debt overwhelms your power to make things better.
The RBA admits it stuffed things up – sort of
Mon, 22 Jul 2019
This article first appeared on the Yahoo website at this link: https://au.finance.yahoo.com/news/did-the-rb-as-monetary-policy-put-our-economy-at-risk-033940907.html
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The RBA admits it stuffed things up – sort of
The Reserve Bank of Australia needs to be congratulated for publishing research which implicitly confirms that it made a mistake when setting monetary policy in the period mid-2017 to early 2019.
Not that the research explicitly says that, but the RBA Discussion Paper, Cost-benefit Analysis of Leaning Against the Wind, written by Trent Saunders and Peter Tulip, makes the powerful conclusion that by keeping monetary policy tighter in order to “lean against” the risk of a financial crisis, there was a cost to the economy that is three to eight times larger than the benefit of minimising the risk of such a crisis eventuating.
The costs to the economy includes lower GDP growth and higher unemployment, that lasts for at least for several years.
A few terms first.
According to the Saunders/Tulip research, “leaning against the wind”, a term widely used in central banking, is “the policy of setting interest rates higher than a narrow interpretation of a central bank’s macroeconomic objectives would warrant due to concerns about financial instability”. In the RBA’s case, the “narrow interpretation” of the RBA’s objectives are the 2 to 3 per cent inflation target and full employment.
In the context of the period since 2017 and despite the RBA consistently undershooting its inflation target and with labour underutilisation significantly above the level consistent with full employment, the RBA steadfastly refused to ease monetary policy (cut official interest rates) because it considered higher interest rate settings were appropriate to “lean against” house price growth and elevated levels of household debt.