It is not quite true that the Reserve Bank only has a single weapon, the blunt instrument that is monetary policy; it also has a jaw bone to flap.
The latest RBA board minutes applied the jaw bone to get two hits out of its next interest rate cut – and, yes, barring a totally unforeseen economic miracle, there will be another cut.
Translated into plain English, the minutes effectively said: “Look, given our own forecasts and no decent wages growth as far as anyone dares guess and the way the world is going, we should cut rates again.
“But, you know, these rate cuts are achieving three-fifths of stuff-all at the moment. Another cut hot on the heels of the last three might do more harm than good.
“So we’re going to wait a bit to see if our forecasts are too pessimistic, even though they’re mostly too optimistic, and (nudge, nudge, wink, wink) we’ll trim another 25 points in February – unless there’s a totally unseen economic miracle.”
And with that application of the jaw bone, the RBA achieved much of what an actual rate would have – it weakened the Aussie dollar a bit – while nonetheless keeping one more shot available in its rather bare monetary ammunition cupboard.
Yet that wasn’t the most interesting thing about the November meeting minutes. For me, it rates fourth behind:
- Our central bank hasn’t totally stopped embarrassing the federal government by pointing out bad policy
- The outlook for half-decent wages growth is as bad as anyone fears – there isn’t any
- The banks are actually passing on nearly all of the RBA’s three rate cuts, never mind the inane political posturing about it.
In his statements after the August, September and October RBA board meetings, Governor Philip Lowe very reasonably included a sentence pointing to one of the causes of our weak wages growth: “Caps on wages growth are also affecting public-sector pay outcomes across the country.”
That sentence disappeared from this month’s statement, fuelling my suspicion that Treasurer Josh Frydenberg had put the governor back in his monetary box.
But, congratulations RBA, the point was still made in the full minutes: “Public sector wages growth was also expected to be constrained over the forecast period, owing to ongoing government caps on wage increases.”
There’s a fine line between not commenting on fiscal policy – which Dr Lowe has promised not to do any more – and making honest observations about the state of the economy.
We would be poorer without any member of the official family doing so.
Maybe they figure Mr Frydenberg wouldn’t bother reading the full minutes.
The government cap was in the context of the miserable prospects of wages growth getting up to where it needs to be to, in turn, lift inflation above two per cent.
The bank fingered the businesses it has a quiet word with for continuing their wages growth strike: “A large share of firms in the bank’s liaison program had continued to report that they expect wages growth to remain around this rate over the year ahead and very few firms expect higher wages growth.”
And, worse, the much-weakened bargaining power of labour is shining through in enterprise bargaining agreements: “New enterprise bargaining agreements were still generally delivering lower wage outcomes than the agreements they were replacing.”
That chimes in with the Melbourne Institute survey of consumers’ wages expectations – we collectively think our wages will only rise by 1.8 per cent over the next year.
That compares with the latest Australian Bureau of Statistics wages index growth of 2.2 per cent.
An economist friend observed that while individuals might not be great at comprehending the big picture, they have a much better idea of what’s happening in their immediate world.
Hence, consumers’ expectations of inflation aren’t much chop, but their wages growth forecasting is quite accurate.
And that is a worry for us all.
As previously explained, it means key forecasts underpinning the federal budget are rubbish and the RBA has no hope of achieving its inflation target during Dr Lowe’s five-year term as governor.
As to the third point about what banks pass on, the RBA explained it wasn’t as simple as populist politicians pretend.
The minutes noted the banks had cut at-call deposit rates by “an average of 60 to 70 basis points” in response to the RBA trimming its cash rate by 75 points. (Deposits are the banks’ biggest source of funds for lending.)
At the same time, the banks cut their headline “standard variable mortgage rates” by about 60 points. However: “Strong competition for high-quality borrowers had led to rates for new and refinanced loans being lower than for existing loans. In addition, borrowers were continuing to switch from interest-only loans to lower-rate principal-and-interest loans.
“This meant that average outstanding mortgage rates had declined by around 65 basis points since the middle of the year. This process was expected to continue.”
So those mean ol’ banks have actually passed on all but 10 points of the 75 points the RBA cut.
Given the squeeze on their net interest margin and how very low deposit rates are, that’s not too shabby.
And the RBA expects that process of lowering average outstanding mortgage rates to continue.
Looks like politicians might have to look for someone else to blame for weak economic growth.
I suggest they try a mirror.