The new Treasurer has a real shot at making the RBA relevant again - and it starts with cutting interest rates

Tue, 30 Oct 2018  |  

This article is from 29 August 2018 and first appeared on the Business Insider website at this link: https://www.businessinsider.com.au/making-the-rba-relevant-again-2018-8 

--------------------------------------------- 

The new Treasurer has a real shot at making the RBA relevant again - and it starts with cutting interest rates

 It is not clear what new Treasurer Josh Frydenberg discussed with Reserve Bank Governor Phillip Lowe during their recent conversation, but one thing that should have been top of the agenda is a reworking of the Statement on the Conduct of Monetary Policy.

The appointment of a new Treasurer opens the door for this vitally important policy document on how the RBA undertakes its policy task to be updated and revamped. 

In September 2016, when former Treasurer Scott Morrison and newly appointed Governor Lowe updated the framework in which the RBA would operate monetary policy, “financial stability” was included as an objective for policy. It is not clear why this would have been added to the RBA’s agenda when the existing 2 to 3 per cent inflation target had been working so well.  Whatever the reason, the inclusion of “financial stability” has meant the RBA has downplayed, if not effectively abandoned its inflation target and this explains the ongoing sluggishness in the rate of growth, the still high level of labour market underutilsation and the associated record low wages growth which has been seen in the past year.

One of the first things Mr Frydenberg should do as Treasurer is revamp the Government’s conduct of monetary policy and exclude financial stability, which was never defined, and return the focus to the inflation target. Under the current arrangements, the RBA has missed its inflation target for the past three years and with its most recent forecasts, the mid point of the inflation target will not be hit until at least 2021.

With monetary policy being held too tight for too long, the economy has not been able to grow fast enough to give work to those ready, willing and able to work more hours. That has held back wages growth and fed into this persistent low inflation rate. Dropping financial stability from the RBA mix would not mean this important aspect of the financial system is irrelevant.

On the contrary.

Frydenberg could simultaneously instruct APRA to reinforce the macro-prudential measures on lending which would keep house prices and the growth in household debt in check. With house prices currently falling and credit growth decelerating, a cautious oversight on bank lending would seem prudent.

If the RBA returns to its inflation targeting policy framework and set policy to achieve that target, quite clearly interest rates would be cut. To get inflation to pick up to 2.5 per cent, immediate interest rate cuts of at least 0.5 per cent would be needed.

Such a monetary policy stimulus would have a limited impact on the housing market, given the coincident tightening of macro-prudential issues, but it would fuel a much need lift in business investment and exports. This stimulus to the business sector would be almost immediate. The hurdle rate for new investment would be lowered, cash flow would be freed up on existing debt and a likely lower Australian dollar would give the trade exposed sectors a much needed boost.

Earlier this year, RBA Deputy Governor Guy Debelle gave a speech celebrating 25 years of inflation targeting in Australia.

He noted, “The inflation target has made a material contribution to the very satisfactory macroeconomic outcomes that the Australian economy has enjoyed over the past 25 years. Inflation has been consistent with target. The unemployment rate on average has been lower and less variable than in earlier periods.”

For Frydenberg, when he gets the message that the economy is muddling along, with inflation too low, wages growth floundering to the point that it is holding back household spending and adding to financial instability given difficulties in debt servicing, will no doubt want to remedy this situation. If he does revamp the RBA’s Statement of Monetary Policy to refocus on the inflation target, the economy would unambiguously be stronger.

Politically, at a time when the government is on the nose and a long-shot to win the next election, some responsible economic stimulus would no doubt be well received by the electorate. This is especially the case if any monetary policy easing gives a boost to business confidence, investment and hiring, which indirectly, would also be helping in locking on the return to budget surplus.

It seems like a win, win, win situation that Treasurer Frydenberg would be wise to pursue.

 

comments powered by Disqus

THE LATEST FROM THE KOUK

The weak economy is turning higher

Mon, 15 Jul 2019

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/just-how-weak-australia-strong-economy-213520159.html 

----------------------------------------------

The weak economy is turning higher

In the space of a couple of months, the rhetoric on the economy has gone from strong to weak.

Curiously, both assessments are wrong.

The economy was actually weak during the first half of 2019 and, if the leading indicators are correct, late 2019 and 2020 should see a decent pick up in economic activity.

It is not clear what has caused this error of judgment and the about face from so many commentators and economists, including importantly the Reserve Bank. A level-headed, unbiased look at economic data confirms that in late 2018 and the first half of 2019, the economy was in trouble. There were three straight quarters of falling GDP per capita, house prices were diving at an alarming rate, there was a rise in unemployment, wages growth remained tepid and low inflation persisted.

These are not the dynamics of a “strong” economy.

Only now, in the rear view mirror look at the economy, are these poor indicators gaining favour, leading to generalised economic gloom.

Australia needs ‘fiscal stimulus', but what does that actually mean?

Wed, 10 Jul 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/australia-needs-fiscal-stimulus-but-what-does-that-actually-mean-203000918.html 

------------------------------

Australia needs ‘fiscal stimulus', but what does that actually mean?

With the economy down in the dumps and the per capita recession now extending to nine months, there is a frenzied call for the government to implement some spending and tax policies to stem the bleeding.

The calls are coming from economists, journalists, the RBA Governor and a bevy of commentators who are demanding a fiscal policy boost from the government to support economic growth. This is all fine and there is a strong case for policy makers to work together to do something to lift the pace of economic expansion.

But there is a problem with the generic “fiscal policy stimulus” demand given that none of the calls have been accompanied by even vague details of what the stimulus means and the areas of spending that should be ramped up or what taxes should be changed.

Sure, there is a suggestion of more spending on ‘infrastructure’ but that is never defined or specified.