It’s 11 weeks since the Reserve Bank shouted “come and get it” to more than 130 Australian lending institutions, offering “at least” $90 billion for up to three years at just 0.25 per cent interest.
The ADIs (authorised deposit-taking institutions) don’t even have to service these loans – the interest is due when the loan is repaid.
If you are a bank, building society or credit union, “Friendly Phil” Lowe will give you $1,000,000 today and you’ll only have to give him back $1,002,500 in a year’s time.
But in 11 weeks, “Friendly Phil” has only been able to push $6 billion out of the RBA’s vault via this “term funding facility”.
That compares with about $2.76 trillion our ADIs had outstanding at the end of April, effectively the same amount as at the end of March as credit growth stagnated.
No matter how cheap money is, there’s precious little demand for it – which is why the economy needs much more fiscal stimulus than the housing construction package the government has foreshadowed.
There was one crucial paragraph in Dr Low’s statement after Tuesday’s RBA board meeting:
“The substantial, co-ordinated and unprecedented easing of fiscal and monetary policy in Australia is helping the economy through this difficult period. It is likely that this fiscal and monetary support will be required for some time.”
In RBA-speak, “some time” means years.
Not for the first time, our central bank is pleading with the federal government to do much more beyond the rapidly approaching financial cliff in September when the JobKeeper payments, JobSeeker supplement, and bank mortgage repayment moratorium are all scheduled to end.
Much of the coverage of Dr Lowe’s statement and his appearance before a Senate committee last week has concentrated on his view that the economy is fairing a little better than the RBA feared in March.
That downplays the reality of the economy being in recession and expected by the RBA to remain weak with unacceptably high unemployment and underemployment “for some time” – at least two years.
Monetary policy’s power has been waning for years as rates have trickled lower in the face of weak investment demand in a soft economy.
Now some economists are suggesting we should follow the lead of some European countries and Japan with negative interest rates – punish depositors for leaving money in the bank and pay institutions to borrow.
That argument ignores the reality that even going negative in the present crisis, monetary policy is “pushing on a piece of string”.
However cheap money is, banks need to have confidence that borrowers will pay it back before they will lend it.
More importantly, businesses need a motive to borrow – the belief that there is sufficient demand to justify borrowing to invest in increasing capacity.
That confidence to invest was missing outside the resources sector before the ’Rona Recession. It’s now officially gone into hiding.
Business borrowing did increase in March, but that was because of cash flow pressures as the COVID crisis hit.
Credit demand is flat at best, while deposit growth is very strong.
The banks’ credit card books shrank by 10 per cent in April from March. Deposits by households rose 2.2 per cent and by businesses 1.9 per cent.
With private demand weak, it’s up to the public sector to fill the gap with intelligent employment-creating spending – or let the economy wallow.
The various state governments have that message, but it seems the federal government is yet to acknowledge the extent of the challenge.
The RBA has clearly signalled it has done as much as it can and is strongly opposed to the “extremely unlikely” possibility of negative rates here.
Dr Lowe said on Tuesday ADIs are expected to make “further use” of the 0.25 per cent TFF in coming months.
He didn’t venture to guess how much further use, but there’s also a September deadline for the easiest bit of the TFF to acquire.
Until then, the RBA will lend ADIs up to 3 per cent of their outstanding loans to Australian households and businesses.
On top of that, there’s bonus funding available until March if an ADI can increase its lending to businesses, especially small-to-medium enterprises.
But first those enterprises need to sniff the demand to make the risk worthwhile and the lenders need to perceive a strong enough business case to expect they will be paid back.