Could rates fall even further?

Thu, 03 Aug 2017  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/rates-fall-even-055840162.html 

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Could rates fall even further?

There’s no way the Reserve Bank of Australia will increase official interest rates while the economy remains in its current rut.

Australia’s economic fundamentals are quite problematic but this has not stopped some analysts from ramping up speculation about interest rate hikes, perhaps before the end of the year. More interesting, the money markets are pricing in higher interest rates over the next 12 to 18 months.

The reason why this is so misguided and misreads the current status of the economy is straight-forward. Growth, inflation and wages growth is low and the unemployment rate is high. It is worth taking a step back to see how the economy was performing the last time the RBA started an interest rate hiking cycle. That was back in October 2009, when the RBA increased the cash rate from 3.0 per cent to 3.25 per cent as the economy picked up steam as the impact of the global crisis faded.

In the six months prior to that hike in 2009, the unemployment rate hovered around 4.2 to 4.3 per cent and at the same time, annual wages growth was locked between 3 and 4 per cent.

Importantly, this ultra low unemployment rate and solid wages growth fed into underlying inflation which was above 3 per cent for two years. It was around 3.5 per cent as the first rate hike of that cycle was delivered.

At that time and with hindsight, it was quite obvious that higher interest rates and tighter monetary policy was needed to reign in inflation pressures which had been stubbornly high. In a nutshell, the economy was strong, with low unemployment, solid wage growth and inflation was uncomfortably high.

Fast forward to today. Let’s now look at the economic fundamentals the RBA will be confronted with as it considers what to do with interest rates.

Now, the unemployment rate is hovering around 5.6 to 5.7 per cent, a full 1.5 percentage points above the rate when the last interest rate tightening cycle started. Annual wages growth is currently at a record low, running at 1.9 per cent, almost half the rate in 2009. A critical point now is the underlying inflation rate. It has been below the bottom of the RBA target band for two years and last week, it was confirmed at 1.8 per cent to be about half the rate at the time of the start of the last interest rate tightening cycle.

For an interest rate hiking cycle to start, inflation needs to pick up to at least 2.5 per cent, while wages growth needs to lift to 3 per cent. This implies the unemployment rate needs to drop to 5 per cent or less and which on even the most optimistic forecasts, seems more a wish that a robust expectations of labour market conditions.

Until these sorts of readings for the economy come to pass, the RBA will not lift interest rates. Indeed, if there is any evidence of low wages growth and low inflation continuing near current levels, the RBA will cut interest rates to a fresh record low.
In the mean time, keep an eye on the data on wages, inflation and unemployment to work out when, and in what direction, the RBA will next move rates.

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THE LATEST FROM THE KOUK

Why don’t governments deliver policies that are good for the electorate?

Mon, 21 Aug 2017

This article first appeared on The Adelaide Review site at this link: https://adelaidereview.com.au/opinion/politics/paying-fair-share/ 

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Paying Their Fair Share

It’s the age-old question: why don’t governments deliver policies that are good for the electorate? Well, the answers are numerous.

Politics and policymaking should be simple. After all, being in government and delivering what voters want — making them happy in other words — and increasing the chances of re-election seems to be the proverbial win-win scenario.

Which begs the question, why don’t political parties do it?

Why don’t they deliver policies that are good for the electorate and good for their re-election chances?

Let’s cut to what the voters, in general, want.

A policy framework where each person who wants a job gets a job is key. In addition, access to quality and affordable health care and education, from kindergarten to university to trades training is fundamental. There are other issues that are basic, simple and fair.

Voters want the government to provide aged-care services that treat the older members of society with dignity. We want decent infrastructure, especially pubic transport and roads. We want people who are doing it tough to be supported by a welfare safety net — a decent rate of pension, unemployment benefits and disability support.

So far, so good.

Australia has given up on solving unemployment

Sun, 20 Aug 2017

This article first appeared on The New Daily website at this link: https://thenewdaily.com.au/money/finance-news/2017/08/16/stephen-koukoulas-unemployment/ 

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Australia has given up on solving unemployment

 It is a sad state of affairs to realise that the current crop of Australian policy-makers have effectively given up on reducing unemployment.

Treasury reckons that the lowest the unemployment rate can go without there being a wages and inflation breakout is around 5.25 per cent.

The Reserve Bank of Australia notes something similar, forecasting that even when the economy is growing strongly at an above-trend pace, the unemployment rate will hover between 5 and 6 per cent.
The current unemployment rate is 5.6 per cent or some 728,100 people – enough to fill the Melbourne Cricket Ground about seven times.

Given the Treasury and RBA estimates, it looks like Australia will never see fewer than about 700,000 people unemployed – no matter what kind of improvement we see in the latest jobless figures on Thursday.
It seems to be a peculiarly Australian issue. In the US, the unemployment rate is 4.3 per cent, in the UK it is 4.5 per cent, in Japan it is 2.8 per cent while in Germany, the unemployment rate is 3.9 per cent. And none of these countries is experiencing a wage/inflation problem. Indeed, even with the very low unemployment rate in Japan, wages are actually falling.