Australian federal treasurer Scott Morrison has joined the growing chorus of senior politicians around the world who are openly questioning the efficacy of the low rate policies being pursued by central banks around the world.
Morrison told the AFR on the sidelines of the IMF/World Bank meetings in Washington over the weekend that in Australia, monetary policy has “exhausted its effectiveness” and that “its ability to impact and influence is diminishing”.
He went further, noting that monetary policy in the current environment is like “pushing on a string”.
Morrison was at pains to say that any decision on further rate cuts was one for the “Reserve Bank governor and board” if they think another cut is necessary.
It’s worth noting Morrison has a proxy on the board in the form of treasury secretary John Fraser who is likely to be advocating the treasurer’s position.
But Morrison’s comments echo those of British prime minister Teresa May who last week told a Conservative party conference that “while monetary policy — with super-low interest rates and quantitative easing — provided the necessary emergency medicine after the financial crash, we have to acknowledge there have been some bad side effects”.
Those side effects particularly were acknowledged by German finance minister Wolfgang Schaeuble who, like Morrison, warned that central banks are reaching the limits of their effectiveness.
“Monetary policy reaches its limits with negative side effects…becoming more and more visible”, Schaeuble said.
Naturally, if politicians are openly questioning the effectiveness of monetary policy, they themselves are undermining it and need to offer an alternative.
In Germany there is growing expectation that Schaeuble will institute billions of dollars in tax cuts, while in the UK, May and her chancellor of the exchequer Philip Hammond have abandoned the deficit reduction plans of former prime minister Cameron and chancellor Osborne.
In Australia however, Morrison has been less concrete, telling the AFR that “what’s more important [than further rate cuts] for our economy is getting on with our fiscal consolidation and bringing forward productivity-enhancing reforms”.
Clearly Morrison still has deficit reduction as a key plank of his, and the government’s strategy. He also believes Australian business needs to play a bigger role in investment, particularly infrastructure.
“We’re in a low-interest-rate, low-growth world but we haven’t quite yet seen the same calibration of investor expectations on hurdle rates,” he said.
But in questioning the efficacy of RBA rate cuts, in saying he doesn’t think further cuts will do terribly much for the economy, and in offering nothing concrete as an alternative other than fiscal consolidation, the treasurer risks leaving Australia with a policy gap.