The RBA seems to be running monetary policy on a hunch

Wed, 27 Jun 2018  |  

This article first appeared on the Business Insider web site at this link: https://www.businessinsider.com.au/the-rba-seems-to-be-running-monetary-policy-on-a-hunch-2018-6 

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The RBA seems to be running monetary policy on a hunch

RBA Governor Philip Lowe made a few quite sensational comments when he spoke at the European Central Bank’s forum in Portugal last week.

Sensational, because it shows the RBA under his stewardship is targeting higher than necessary unemployment as the tool for containing household debt and he has all but abandoned the RBA’s inflation target which has been in place for over 25 years.

Recent data shows Australia failing to make meaningful inroads into reducing unemployment, as Australian interest rates have remained well above those in the rest of the industrialised world.

Lowe acknowledged he and his RBA were the odd ones out in a room of central bankers, noting that others had reacted to high unemployment and extremely low inflation by cutting interest rates to near or below zero and many implemented quantitative easing as a means to kick-start their economies, while the RBA has stopped cutting interest rates at 1.5 per cent, despite low inflation and persistently high unemployment.

The RBA is the odd one out too, because Australia’s unemployment has been hovering around 5.5 per cent for the past year, little changed from where it was 4 or 5 years ago, when in the US, Japan and Eurozone, unemployment rates have cascaded lower and have started to underpin a noticeable pick-up in wages.

Explaining this maintenance of relatively high interest rates in Australia, Lowe said that high debt levels were the “number one domestic risk”, and implied interest rate policy would be kept tighter than implied by the inflation, wage and unemployment dynamics in an effort to reduce that risk.

It’s a sensational choice.

To be sure, household debt in Australia is high, but a risk?

Data which hint at debt risk include information on the level of bank bad debts and loan arrears. Debt is only “too high” when a significant proportion is not paid back. This hurts the banks, undermines credit growth and in many cases, leads to recession.

Fair enough.

But the RBA’s own data shows that bad debts in Australia continue to track near record lows. Late payment times are also near historical lows. In other words, the risks to the economy from financial instability and high debt are not showing up in any hard data.

The RBA thinking appears to be a hunch, a feeling, the “vibe”.

Lowe also made the startling observation that if policy was eased as a means of lifting inflation back to the target range and lowering unemployment, “it would be mainly through people [households] borrowing more money”.

What?

Lowe doesn’t seem to realise that there is more to economic management than interest rates. Household borrowing need not rise with lower interest rates if the policy makers were to use its other policy levers to impose lending restrictions in areas it considers problematic. Dwelling investment and housing more generally seem to be the main ones.

It is simple.

With such regulatory changes, lower interest rates need not add to household debt if interest rates are cut, but would allow for a further lift in business investment, encourage exports through a lower Australian dollar, and improve the cash flow for those with debt.

In other words, the non-housing parts of the economy currently in need of a boost would get that boost.
Perhaps most extraordinary of all, in a comment matching the cliché “I am from the government and I know what is good for you”, Lowe noted that “we’re about maximising the welfare of the people” as a reason for his heavy hand on monetary policy.

This ignores the 720,000 people unemployed and the 1.1 million under employed. It also ignores the chronically low wages growth which is dogging the economy.

The RBA could and should cut interest rates if it was serious about lowering unemployment and getting inflation back into its target band. In concert with a tightening in lending rules, it would not lead to higher household debt, and it might just see the economy sustain 3 per cent GDP growth, get inflation back to the target and get unemployment below 5 per cent.

 

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 Will falling house prices trigger the next Aussie recession?

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Potential house buyers who have held off taking the plunge in the hope of falling prices seem to be staying away, perhaps hoping for further price falls. But also influential factors forcing buyers away is the extra difficulty getting loans approved as banks tighten credit standards, then there are concerns about job security and associated awareness of probable cash flow difficulties given the weakness in wages growth. It is remarkably obvious that house prices will continue to fall and this poses a range of risks to the economy.

Research from a range of analysts, including at the Reserve Bank of Australia, show a direct link between changes in housing wealth and consumer spending. This means that when wealth is increasing on the back of rising house prices, consumer spending is stronger.

This was evident in Sydney and Melbourne, in particular, when house prices in those two cities were booming in the two or three years up to the middle to latter part of 2017. Retail spending was also strong. Looking at the downside, in Perth where house prices have fallen by more than 10 per cent since early 2015, consumer spending has been particularly weak.

Punters point to by-election troubles for Labor

Mon, 16 Jul 2018

 

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In the three seats where the results are not a forgone conclusion, the flow of money on Liberal candidates over the last few days has been very strong.

The Liberal Party are now favourites to win Braddon and Longman and in Mayo, Liberal candidate Georgina Downer has firmed from $4.20 into $2.75.

If the punters are right, Sublime-Saturday would see Labor lose Braddon and Longman and could see Liberal’s sneak back in Mayo.

If so, it would be odds on that Prime Minister Turnbull would go to the polls as soon as possible, not only to take advantage of the by-election fallout, but, from a different angle, go before the housing market and the economy really hit the wall, probably in late 2018 or 2019.

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Liberals $1.70 (was $2.25)
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Labor $2.50 (was $1.85)