RBA: "no evidence that monetary policy overall is more potent in Australia"
A senior RBA official has acknowledged that there is "no evidence that monetary policy ... is more potent in Australia than [elsewhere]".
RBA Assistant Governor (financial markets) Kent spoke this evening on The financial system and monetary policy.
Importantly, he acknowledged that, "... the effect of monetary policy is neither faster nor more potent in Australia than elsewhere", adding that “[while] the effect of interest rates on the cash flows and behaviour of indebted households receives extensive attention in Australia [it] is only one side of the cash-flow channel, and that, in turn, is only one of the channels of monetary policy transmission”.
This is a point that CCI has long made, despite the widely-held market belief the interest rates are more effective in Australia because of the cash flow effect on heavily-indebted households, something that has periodically coloured the RBA’s own commentary on the economy.
This point also gels with analysis showing that monetary policy in Australia has not been particularly tight relative to history, with policy less restrictive than other advanced economies that have made more progress in bringing inflation under control, where some other central banks are now cutting interest rates.
On financial stress, Kent mentioned that, “Despite the substantial increase in mortgage payments, there has been little increase in acute financial distress among borrowers. Mortgage arrears rates have risen, but they remain low and at similar levels in Australia and the United States”, with households still adding to mortgage buffers.
However, corporate insolvencies have picked up, which Kent thought was driven more by factors other than interest rates – “while company insolvencies have increased over the tightening phase, this largely reflects factors beyond the direct effects of higher interest rates” – where it is true that the use of fixed-cost contracts was a catalyst for many construction companies going broke.
Finally, Kent talked about the reluctance of the RBA to follow its peers and offer explicit forward guidance on interest rates, stating that, “Outside the pandemic episode, the RBA has tended to provide forward guidance that is more infrequent, short-term and qualitative than many other central banks. I have outlined some of the arguments for this, but I think it would be worth reviewing the RBA’s approach to forward guidance from time to time, including to consider other ways that the RBA might clarify the nature of its reaction function. Any such reviews should carefully account for features of Australia’s financial system that set it apart from other economies.”
Note that the RBA did not broadcast the speech, suggesting that it will publish audio of the Q&A session tomorrow, which presumably will include questions about the economic spillover of Trump policies to Australia.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
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