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

Is the Aussie economy slowdown good or bad news for you?

Mon, 04 Mar 2019

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/aussie-economy-slowdown-good-bad-news-015353581.html 

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

Is the Aussie economy slowdown good or bad news for you?

Your economic well-being is undergoing some significant changes at the moment. Whether that is good or bad news depends on your home ownership status and intentions to buy, and the amount of money you have in invested in shares either directly or indirectly in your superannuation fund.

To the stock market first

Having been beaten down late last year, the Australian stock market has staged a powerful pick up. Compared with the low point in December, the ASX200 has risen over 12 per cent in two months. This is, quite clearly, great news for your superannuation balance and for your wealth if you own any shares directly.

The change in sentiment about interest rates and a solid profit reporting season has underpinned this jump in share prices and with US and local interest rates set to remain low or be lowered in the months ahead, share prices should continue to do well.

Falling house prices met with dismay and joy

From the perspective of personal finances, the news on falling house prices has been greeted with both dismay and joy. Home owners in Sydney Melbourne, Perth and Darwin and reeling under the weight of wealth destruction with prices down by between 10 and 25 per cent.

In Sydney, for example, that house that was valued at $1 million back in the middle of 2017 is now worth around $870,000, a drop of $130,000 in less than two years.

Ouch!

2019-20 budget will be 'problematic': here's why

Wed, 20 Feb 2019

This article first appeared on the Yahoo Finance website at this link: https://au.finance.yahoo.com/news/2019-20-budget-will-problematic-heres-194957605.html 

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

2019-20 budget will be 'problematic': here's why

Word has it that the framing of the budget, due to be handed down by Treasurer Josh Frydenberg the day after April fools day (and around 6 weeks before the election), is more problematic than usual.

Problematic because there is some mixed news on the economy that will threaten the current forecast of a return to budget surplus in 2019-20.

Housing has gone into near free-fall, both in terms of prices and new dwelling approvals. This is bad news for GDP growth.  The unexpected severity of the housing slump is the key point that will see Treasury revise its forecasts for GDP growth, inflation and wages lower when the budget is handed down.

It will be impossible for Treasury to ignore the recent run of hard data, including the weakness in consumer spending and a generally downbeat tone in the recent economic news when it sets the economic parameters that will underpin its estimates of tax revenue and government spending and therefore whether the budget is in surplus or deficit.