There is a huge bucket of irony in RBA Governor Glenn Stevens speech to CEDA last night.
For someone who has passively sat by with the exchange rate ridiculously overvalued for several years and who has been reluctant to use monetary policy to manage the business cycle and the interest rate sensitive parts within, Mr Stevens calls for economic agents to “most of all, [show] a willingness to take the occasional risk” are a touch disingenuous.
Stevens questions “whether our overall business environment is conducive enough to risk-taking and innovation”.
Look in the mirror Glenn!
It has been pretty obvious for the last couple of years that the Australian dollar has been over-valued, by a large amount, and this market misalignment is one reason why real GDP has been below trend over that time and as a result, the unemployment has risen to a decade high of 6.2 per cent.
And what ‘risk-taking and innovation’ did the RBA take in trying to correct this massive handbrake on growth?
Did it intervene to sell the Australian dollar? No.
Did it fast track interest rate cuts? No.
On the contrary, it has not engaged in any market operations to push to the Aussie dollar lower and it is holding interest rates too high because it has an unhealthy obsession with house prices.
And what risk taking and innovative policy has the RBA taken on housing? None.
The lessons from macroprudential changes have been there to see in New Zealand for around the last 15 months. The policies in New Zealand have worked and the economy is sailing along.
The RBA slammed the notion of macroprudential policy changes up until a few months ago – no innovation of risk taking here. At least now that the Bank has realised the errors of its way, is looking to, perhaps, do something in this space.
“Perhaps” is the operative (or inoperative) word there because until now, there has not been an iota of policy change from the RBA and in the mean time, investors in property are going crazy and Sydney house prices are rising faster than my blood pressure during the rugby league grand final.
It is increasingly obvious, the RBA’s default of not adjusting the official cash rate and then only moving it when it is obvious it needs to move smacks of low risk taking, uninnovative policy. It has cost the economy. It is fraught with dangers for the economy and these problems are showing up in the current economic conditions.
The end point is that The RBA does not adjust interest rates often enough and this results in growing imbalances and private sector complacency when it comes to borrowing, investment, lending and saving.
The economy is poorer for it.
Just look at the last monetary policy easing cycle, which began 3 years ago with a 25 basis point rate cut in November 2011. Including that move, rates have been cut on 8 occasions in 3 years. The current cycle is moving to be one the longest cycles for cutting interest rates even though there have been some dramatic swings in the economy that could have seen a more active approach with monetary policy.
Obviously, in 2011 and early 2012, the RBA should have cut earlier and harder. I got criticised for calling the RBA foot dragging as ‘candy arsed’ but it is clear they should have reacted to the terms of trade free-fall with a more risky approach to monetary policy. The Aussie dollar may have lost some strength oomph, especially if the easing was accompanied with intervention on the exchange rate. The rate of GDP growth would have been stronger and the unemployment rate would have been help a little lower.
While this may have pumped up house prices even more in late 2012 and into 2013, this obvious policy action in the period from December 2013 to about April 2014 would have been to hike rates, introduce macroprudential policy changes and crimp that house price exuberance. The announcement effects of those hikes and ability to explain the changes may have deterred some investors from buying into the house price boom.
And now, with the terms of trade falling, the RBA could be moving to a cutting cycle, but of course the economy would have been very different if the RBA had taken some risks and been a bit more innovative.
Some other odd parts of Stevens speech in was said that “the economy has spare capacity. Inflation is well under control and is likely to remain so over the next couple of years.”
He said also “personally I think I’m less worried by the prospect that things will be too strong than by the possibility that they will be too weak in the near term.”
Yet the low risk, boring and uninnovate approach to monetary policy is to delay the introduction of macroprudential policies to cool housing, avoid intervening in the Aussie dollar and not using interest rates when it seems all but certain the unemployment rate will keep rising and the inflation rate will keep falling.
Stevens is right. Australia is poorer for the lack of risk taking and innovative action form the economic decision makers.