Debt and job fears are killing monetary policy in Australia


After the speech from RBA assistant governor Christopher Kent at ANU last night, we now know there’s high-level confusion about what is happening in the economy at the household level.

Kent said monetary policy was still working but there were significant headwinds and, crucially, the transmission mechanism wasn’t working as well as it might – think slippery clutch in the car.

Indeed, Kent said explicitly that “it would be helpful to better understand the behaviours of different types of households using household-level data”.

It’s somewhat disconcerting that in the space of a few days, the RBA’s governor has publicly admitted he worries about the RBA’s forecasting ability and now his assistant says the RBA doesn’t understand what’s going on.

But Kent did propose a decent theory in his speech which explains what’s happening at a household level. It rests on two tenets.

The first is that Australians have too much debt and are concerned about paying it back. The second, more important, is that for whatever reason, Australians are really worried about losing their jobs. That would threaten their ability to repay their debt, feed their family, and keep their house.

Even though Australians have been saving and increased their interest-bearing assets, Kent said that because they have so much debt, “a reduction in interest rates still lowers households’ net interest payments, and by much more than was the case in earlier decades”.

“This larger response reflects the substantial increase in housing credit from the early 1990s to the mid 2000s.”

That means monetary policy is supposed to work. But he added:

“…the response of consumption and indebtedness will depend on how different types of households are responding to these forces. Let me make this clearer with some examples.

“Some households may have revised down their expectations for income growth and may also be more uncertain about their incomes. This would be consistent with the substantial decline in wage growth and the rise in the unemployment rate over the past few years.”

Australians are unusually worried about losing their jobs – even though total employment in the economy is at the highest level ever. Westpac said in its excellent Redbook on the weekend that “a perceived lack of job security as a key restraining factor for consumers”.

That’s the answer the RBA is searching for – too much debt and fear of job losses.

Now for the research to prove it.

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