“Full employment” are only two words, but the Reserve Bank Governor Philip Lowe changed everything by using them to explain why the RBA is prepared to keep cutting interest rates.
Without spelling it out, Dr Lowe’s brief post-board statement echoes the European Central Bank’s famous “whatever it takes” comment.
“Unconventional monetary policy” is on the table and only a rate cut or two away.
And it signalled there are more rate cuts coming.
The governor’s statement effectively called out as a lie the Morrison/Frydenberg chant of “strong economy” for the past year.
Central banks don’t cut the interest rates in strong economies to nothing or beyond. Central banks don’t consider printing money and handing it out in a strong economy.
Sharp-eyed economist Jason Murphy, the person who spotted an unscripted August comment by Dr Lowe admitting cheap money is creating future problems by pushing up asset prices, was quick to highlight the “full employment” meaning.
“It makes me think the RBA is willing to shoot all its ammo.”
— ☔Jason Murphy (@jasemurphy) October 1, 2019
The foreign exchange market got the message immediately – down went the Australian dollar.
That is exactly what the RBA would have hoped. A weaker currency is about the only genuinely beneficial power left in lowering rates at this point.
As the RBA has acknowledged, pushing up asset prices is a double-edged sword, though Treasurer Josh Frydenberg seems to be a big fan of it. “How good are rising housing prices?” he has effectively cheered.
By setting “full employment” as the bank’s public line in the interest rate sand, the RBA has ticked off the first two types of “unconventional” monetary policy it listed for the federal government.
- Very low and even negative policy interest rates
- Explicit forward guidance that policy rates will remain at a very low level until some time has passed or until certain conditions are met.
“Full employment” doesn’t mean everyone who wants a job can has one. It means the NAIRU – the non-inflation accelerating rate of unemployment.
The problem with the NAIRU is that nobody knows what it is until it’s been passed.
We know what it’s certainly not – the 5 per cent the RBA used to assume until it became blindingly obvious they were wrong and dropped the target to 4.5 per cent.
Greater Sydney’s unemployment rate has dropped a smidge below 4 per cent and has been around 4 for a year or more – and there’s no sign of wages growth surging, let alone surging to a level that would start pushing up inflation.
In the meantime, Australia’s unemployment rate is rising, not falling, with something like consensus that it’s on the way to 5.5 per cent.
So, with the government actually tightening fiscal policy (that’s what going into surplus means, taking money out of the economy), how much monetary stimulus has to be thrown at the sub-par wages growth, the retail recession, weak consumption growth, hesitant business investment and a drought to get unemployment to plunge from 5.5 to 4 per cent?
With the federal government offering no help, the answer is a bloody lot. And our official cash rate is now just 0.75 per cent.
And there’s another dirty little secret that has been exposed by the Australian Bureau of Statistics.
Nearly all the surprisingly strong jobs growth over the past year has come from the public sector – and most of that from state and local governments, not the feds.
The states are dependent on shrinking GST collections and falling stamp duty income, yet they have been the ones doing the heavy lifting on employment.
Last night, Dr Lowe had a chance in a Melbourne speech to yet again ram home his message about monetary policy being unable to provide sustainable growth. He’s been telling the coalition government that for several years now and it’s been made plain they don’t like hearing it.
So, just like his speech last week, the message was somewhat muted and, at one stage, quite bizarre.
The message was there last night when he discussed the global problem of low rates: “… the key to a return to more normal interest rates globally is addressing the factors that are leading to the low appetite to invest, relative to the appetite to save. This is mainly a task for governments and businesses, not for central banks. Whether or not this will happen, only time will tell. But as a central bank in a small open economy we have to take the world as we find it.”
And he came back to it – softly, softly – later in his speech after looking very hard for a glass more than half full: “My earlier point about the solution to low interest rates globally is relevant here in Australia too. We will all be better off if businesses have the confidence to expand, invest, innovate and hire people. Given Australia’s strong longer-term fundamentals this should not be out of our reach, but it does require constant effort. One part of this effort could be a renewed focus on structural measures to lift the nation’s productivity performance.”
There’s no more blatant lecturing of his boss, Treasurer Frydenberg.
The bizarre bit in the middle of those two quotes was a repeat of last week’s belief that the economy had reached “a gentle turning point”.
“The economy has been through a soft patch recently, but we are expecting a return to around trend growth over the next year.
“There are a number of factors that are supporting this outlook. These include the low level of interest rates, the recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some established housing markets, and a brighter outlook for the resources sector. Together, these factors provide a reasonable basis for expecting that the economy will remain on an improving trend from here.”
A quick check of those points:
- Beyond the currency, monetary policy this weak and weakening is like pushing on a piece of string – it makes the asset-rich richer by inflating prices. And it takes time to work
- The verdict is in on the first round of tax cuts – they have done little. There should be a lift in September retail sales, but in the real world, they haven’t added up to much and were lower than folk expected
- “Stabilisation in some housing markets” is a euphemism for Sydney and Melbourne housing prices taking off again. Stabilisation would be good, another price boom is not
- Yes, a tick for the resources sector – but the Perth economy at present is an example of soaring corporate profits no longer trickling down.
Against those points, there is the worsening drought, the ongoing government wages cap at a rate that sends after-tax pay packets backwards, a welcome rise in infrastructure spending (mainly funded by the states that can still afford it) that will counter the fall in housing construction but needs to go further. The federal contribution in real terms is back around what Joe Hockey, the treasurer before last, was promising.
Oh, and there are the costs of climate change that the government refuses to consider.
Thus, Governor Lowe was left with this meek submission to his Melbourne business audience last night on why the bank is cutting rates: “We are seeking to make more assured progress towards both full employment and the inflation target. We still expect to make progress on both fronts, but that progress is slower than we would like. Today’s decision will help.”
It will help, as opposed to doing nothing. It won’t solve the problem.
And the response from the government to the cut?
Treasurer Frydenberg was disingenuous at best, or simply lied.
“It is the government’s expectation that the banks will pass on this 25 basis point rate cut in full,” Mr Frydenberg said in a press conference.
Labor’s shadow Treasurer, Jim Chalmers, matched him with the same inanity. It’s what hapless politicians always do.
Mr Frydenberg has worked for a bank. If he doesn’t know that banks can’t match the cuts at this level and the next level without making deposit rates too unattractive, he shouldn’t be Treasurer.
And there was the government’s strange appointment as head of the House of Representatives economics committee, Tim “Franking Credits” Wilson, who tweeted that he was disappointed the RBA had cut rates.
Disappointing @RBAinfo decided to cut interest rates again. The price of money is not an issue. I’ve yet to be convinced cuts have any positive impact. The reverse is likely by discouraging savings and those that have to spend.
— Tim Wilson MP (@TimWilsonMP) October 1, 2019
What else could the RBA do when the government refuses to help? Maybe he was being very brave in challenging his bosses’ economic policy, or he just likes criticising the RBA, or he doesn’t understand much about economics.
And the really crazy thing is that Australia is in this position before the cooling global winds have really reached us.