Why the Reserve Bank and Federal Government disagree on Australia’s coronavirus recovery
These are unusual times.
Despite an economy still recovering from one of the worst recessions on record with high levels of jobless Australians, housing is booming across the country, and all in the complete absence of any immigration.
There is just as much confusion in the world of finance. Stock markets that for months have been priced in forever blue skies and sunny weather have suddenly been rocked by concerns in money markets that inflation, which has been dormant for much of a decade , could again strangle the economy.
Conflicts also play out at the leadership level.
While the Federal Government is adamant that the stimulus must be undone, to allow the private sector to pick up the slack in the recovery, the Reserve Bank (RBA) is doubling down, arguing that it will be years before Australia cannot wean itself off the urgency of zero interest rates.
This battle escalated dramatically last week with one of the most important speeches ever given by a Reserve Bank governor; a speech that underscored how far we are from our goal of getting the economy back on track.
As always, however, most of it has been lost in the noise about housing and the looming danger that banks will start pumping as much money as possible into a booming property market again.
Real estate boom headache
Central banks like the gradual rise of asset markets. Slow and steady increases in real estate and stocks build confidence in the economy and help stimulate spending as people feel wealthier.
Sudden and sustained bursts, on the other hand, are cause for serious concern.
There was no respite over the weekend. Property auction clearance rates jumped to 83% nationally with extraordinary activity in the two largest markets with Sydney at 87% and Melbourne at 80%.
It’s a boom fueled by ultra-low interest rates, increased demand from first-time home buyers and banks actively competing for new business. Almost as soon as new properties are listed, they are sold, leaving the market short of inventory.
According to the Australian Bureau of StatisticsJanuary first-home purchase commitments hit a 12-year high and the pace appears to be picking up.
That prompted RBA boss Philip Lowe to fire a warning shot last week. Interest rates, he said, would stay low for at least three years. This is the time it will take to get back to square one. But there were other steps regulators could take to calm the housing market.
“There are various tools, other than higher interest rates, to address these concerns, leaving monetary policy to focus on getting the economy, jobs and wages back on track,” he said.
Essentially, the RBA and banking regulator APRA would simply make it harder for borrowers to get a loan, putting the brakes on prices.
Then he brought down the hammer. The Council of Financial Regulators, which he chairs, would move quickly to rein in banks if lending standards deteriorate and put the financial system at risk.
“We’re not at that stage, but we’re watching carefully,” he said.
This puts the RBA governor on a potential collision course with the federal government.
Responsible non-responsible loan
Since Federal Treasurer Josh Frydenberg announced the rollback of responsible lending laws last year, consumer groups have risen up, warning that Australia will soon see a resurgence of the kind of predatory lending that precipitated a commission. royal.
The federal government, on the other hand, insisted that the bank regulator’s existing lending standards and code of banking practice provided enough protection for borrowers.
Privately, many senior bankers have expressed surprise at the changes, especially since they were brought up so soon after the royal commission and its damning findings. But all welcomed them, especially given the fears that permeated the housing market as the global economy plunged into recession.
Many expected house prices to plummet by 20% or more last year as the pandemic-induced recession gripped the country. To make matters worse, credit growth had already slowed as banks all paid close attention to responsible lending laws that had not been properly enforced for years.
Part of the rationale for the rollback of the laws – introduced by Labor in 2010 in the wake of the global financial crisis – was that economic conditions had changed and the laws were hampering the supply of credit.
Clearly, with new housing loans up 44% in January from a year agothis is no longer the case.
And that forces the RBA to try to rein in that extra cash.
Wage growth: RBA says yes, government not so enthusiastic
Over the past three weeks, central banks around the world have been on the back foot. Money market traders adopted a vigilante-style assault on their policies, forcing interest rates higher.
While central banks waded into bond markets and bought up government debt in an effort to keep interest rates – short, medium and long term – low, bond market investors did the opposite. They dumped government bonds around the world, forcing rates higher, causing one of the biggest upheavals in the bond market in decades.
The RBA has only recently converted to the practice of money printing. After taking the plunge last year, he is now embarking on what appears to be an indefinite schedule. He is about to start his second round and a third is clearly planned.
Why? Because he thinks our unemployment rate is way too high. And, more importantly, he abandoned the long-held belief that a 5% unemployment rate is the sweet spot; that anything below this causes inflation, as companies are forced to compete for workers by raising wages.
The RBA now estimates that rate to be around 4% and possibly even lower, which explains why wages have been stagnating for years.
Currently, the unemployment rate is at 6.4%. To bring the unemployment rate down that far will take a huge effort. That’s why he’s adamant he won’t raise interest rates for years. There’s nothing Phil Lowe would like more than a wage break to light a fire under inflation, an idea that doesn’t quite resonate with the government.
Even before the coronavirus swept through the global economy last year, the RBA had been forced to cut interest rates on several occasions. Economic growth was slow, inflation had not reached the 2.5% target for four years and wage growth was at historically low levels.
He had repeatedly called on the federal and state governments to start doing their part; that the task of reviving the economy could not be left solely to the Reserve Bank and that it had to spend on expensive infrastructure programs.
We may be coming out of the recession. But these old problems are about to resurface.
RBA forced to go it alone
The centerpiece of the federal government’s economic bailout ends in a fortnight. At around $60 billion, JobKeeper wasn’t cheap. But it worked and it kept millions of Australians tied to their employers through the darkest days of the recession.
After last week’s targeted aid to tourism, or Qantas more specifically, it is clear that the Federal Government is determined to end aid. Corporate Australia, he says, must now take the race.
But will he? Business investment has been weak for years and the most recent national accounts show that it has held back growth. And this despite a much better than expected half-year earnings season that generated record profits and exceptional dividends for shareholders.
Once again, employees are missing out on profit action, part of a trend that has been going on for decades in the developed world. The problem is, as central bankers know all too well, the less workers get paid, the less they spend. And the less they spend, the slower the economy grows.
With the federal government now stepping back so it can focus on reducing its debt and deficit, that puts the entire burden on the RBA. And with interest rates at 0.1%, it will have to be much more creative if it is to stage a sustainable recovery.
Negative interest rates, anyone?