RBA Governor Philip Lowe made a few quite sensational comments when he spoke at the European Central Bank’s forum in Portugal last week.
Sensational, because it shows the RBA under his stewardship is targeting higher than necessary unemployment as the tool for containing household debt and he has all but abandoned the RBA’s inflation target which has been in place for over 25 years.
Recent data shows Australia failing to make meaningful inroads into reducing unemployment, as Australian interest rates have remained well above those in the rest of the industrialised world.
Lowe acknowledged he and his RBA were the odd ones out in a room of central bankers, noting that others had reacted to high unemployment and extremely low inflation by cutting interest rates to near or below zero and many implemented quantitative easing as a means to kick-start their economies, while the RBA has stopped cutting interest rates at 1.5 per cent, despite low inflation and persistently high unemployment.
The RBA is the odd one out too, because Australia’s unemployment has been hovering around 5.5 per cent for the past year, little changed from where it was 4 or 5 years ago, when in the US, Japan and Eurozone, unemployment rates have cascaded lower and have started to underpin a noticeable pick-up in wages.
Explaining this maintenance of relatively high interest rates in Australia, Lowe said that high debt levels were the “number one domestic risk”, and implied interest rate policy would be kept tighter than implied by the inflation, wage and unemployment dynamics in an effort to reduce that risk.
It’s a sensational choice.
To be sure, household debt in Australia is high, but a risk?
Data which hint at debt risk include information on the level of bank bad debts and loan arrears. Debt is only “too high” when a significant proportion is not paid back. This hurts the banks, undermines credit growth and in many cases, leads to recession.
But the RBA’s own data shows that bad debts in Australia continue to track near record lows. Late payment times are also near historical lows. In other words, the risks to the economy from financial instability and high debt are not showing up in any hard data.
The RBA thinking appears to be a hunch, a feeling, the “vibe”.
Lowe also made the startling observation that if policy was eased as a means of lifting inflation back to the target range and lowering unemployment, “it would be mainly through people [households] borrowing more money”.
Lowe doesn’t seem to realise that there is more to economic management than interest rates. Household borrowing need not rise with lower interest rates if the policy makers were to use its other policy levers to impose lending restrictions in areas it considers problematic. Dwelling investment and housing more generally seem to be the main ones.
It is simple.
With such regulatory changes, lower interest rates need not add to household debt if interest rates are cut, but would allow for a further lift in business investment, encourage exports through a lower Australian dollar, and improve the cash flow for those with debt.
In other words, the non-housing parts of the economy currently in need of a boost would get that boost.
Perhaps most extraordinary of all, in a comment matching the cliché “I am from the government and I know what is good for you”, Lowe noted that “we’re about maximising the welfare of the people” as a reason for his heavy hand on monetary policy.
This ignores the 720,000 people unemployed and the 1.1 million under employed. It also ignores the chronically low wages growth which is dogging the economy.
The RBA could and should cut interest rates if it was serious about lowering unemployment and getting inflation back into its target band. In concert with a tightening in lending rules, it would not lead to higher household debt, and it might just see the economy sustain 3 per cent GDP growth, get inflation back to the target and get unemployment below 5 per cent.
Stephen Koukoulas is a Research Fellow at Per Capita.
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