RBA's forecasts put policy debate in a difficult position: Westpac's Bill Evans

RBA's forecasts put policy debate in a difficult position: Westpac's Bill Evans
Bill EvansAugust 17, 2020

EXPERT OBSERVER

Recently the Bank has communicated extensively with the market.

This has included a major speech from the Governor to the Australian Business Economists; his the semi annual appearance at the House of representatives Standing Committee on Economics; and the August Statement on Monetary Policy.

So, it comes as no surprise that the Minutes of the August Board Meeting contain no surprises.

The Board confirms that it does “not rule out adjusting the current package if circumstances warranted”.

The package is highlighted by a 0.25% cash rate and a 0.25% target for the three year bond rate.

The condition for the three year bond target is somewhat looser than for the cash rate target with “progress towards the inflation target” compared with “confident that inflation will be sustainably within the 2–3 per cent target band”.

For that reason “it would be appropriate to remove the yield target before the cash rate itself is raised”.

This policy description has been used consistently since the Board minutes of the April meeting.

It is not entirely clear as to whether “remove the yield target” means abandon yield curve control or adjust the level of the target to, say, 0.40%.

In his appearance at the Parliamentary Committee he opined that the three year target of 0.25% was reasonable since he expected that the cash rate would hold at 0.25% for the next three years.

However, he was guarded as to whether he thought it likely that the 0.25% would hold for five years and therefore it was  not encouraging that the target of 0.25% would be extended to five years.

My preference would be that if in 2022 the Bank was still of the view that the cash rate was unlikely to hold at 0.25% for another three years it would be appropriate to lift the three year target rate to, say, 0.40% thus maintaining yield curve control without having to defend an unrealistic target.

Given that this current language is likely to be used consistently in the Minutes certainly through 2021 the Board can maintain its flexibility on whether to abandon yield curve control or set a different target rate.

Another issue for policy is the Australian dollar. The Governor stated last week that a lower dollar was helpful in boosting jobs through a lift in competitiveness.

With the Bank’s assumption that foreign borders would remain closed until mid- 2021 the benefit of a more competitive dollar is blunted somewhat in the near term.

However, he stated that any move to intervene to lower the dollar would be ineffective if the value of the dollar was in line with fundamentals.

In fact, in the Minutes we see “The Australian dollar had been broadly in line with fundamental determinants, such as commodity prices and interest rate differentials”.

With the outlook for commodity prices encouraging and interest rate differentials moving in a very narrow band the opportunity for a grossly overvalued AUD to emerge prompting some currency intervention seems unlikely.

Adopting a negative interest rate policy to lower the fundamental value of the dollar through a widening the yield differential has been described by the Governor as “ extraordinarily unlikely”.

I am always interested in the detailed economic discussion for insights from the Bank’s extensive liaison work with business.

In that regard “Information from the Bank’s liaison program indicated that the share of contacts expecting to freeze wages or to implement temporary wage cuts was higher than in the past”.

With wages growth being a key determinant of inflation that news will not be comforting for a central bank targeting a return to 2–3% inflation.

All three economic outlook scenarios – base; upside; and downside had inflation below 2% (upside 1.75%) by end 2022 with the downside scenario seeing inflation at 0.5% even by end 2022.

The conclusion was that “underlying inflation pressures would remain subdued for a considerable period”.

On business investment “information from liaison with businesses and recent surveys indicated that weakness in non- mining business investment over recent quarters would become more pronounced in the period ahead”….” Firms were prioritising their liquidity positions in response to uncertainty about future demand”….” many non-residential projects that had not yet commenced were on hold”.

Conclusion

The Bank’s forecasts put the policy debate in a difficult position.

What does “progress towards full employment“ mean?

If the unemployment rate has fallen from the forecast peak of 10% (we think that is too high – more like 8.5–9.0%) to 7% does that qualify as sufficient “progress” to tighten policy?

Yes, a three percentage point fall in the unemployment rate is significant but is it sufficient “progress”?

Surely there is a case for maintaining maximum policy stimulus if you are that far away from full employment and inflation has spent years outside the target band.

On the other hand, if the forecasts prove to be optimistic (and the downside scenario prevails) there should be a  debate around what other policy options might be considered effective.

Perhaps, as we move forward, that debate will merit more attention.

BILL EVANS is Chief Economist for Westpac. 

Editor's Picks

"One of the rarest finds on the Mornington Peninsula": Inside Hali Dromana
BLVD pursues WELL Certification as demand for healthy homes grows
Off the plan apartment buying 101: What is BESS?
First look: Freecity lodges Crows Nest TOD tower
Walkability drives demand at Stones Corner’s latest apartment development, Corner House

Related Projects

16-22 Maud Street, Newstead QLD 4006
16-22 Maud Street, Newstead QLD 4006
16-22 Maud Street, Newstead QLD 4006
Price
Contact agent
35-37 Mount Street, Prahran VIC 3181
35-37 Mount Street, Prahran VIC 3181
35-37 Mount Street, Prahran VIC 3181
Price
Contact agent
118-124 Benelong Road, Cremorne NSW 2090
118-124 Benelong Road, Cremorne NSW 2090
118-124 Benelong Road, Cremorne NSW 2090
Price
Contact agent
118-120 Matthew Flinders Drive, Cooee Bay QLD 4703
118-120 Matthew Flinders Drive, Cooee Bay QLD 4703
118-120 Matthew Flinders Drive, Cooee Bay QLD 4703
Price
Contact agent
26-62 Kinross Road, Thornlands QLD 4164
26-62 Kinross Road, Thornlands QLD 4164
26-62 Kinross Road, Thornlands QLD 4164
Price
Contact agent
9-11 Baroonba Street, Whitebridge NSW 2290
9-11 Baroonba Street, Whitebridge NSW 2290
9-11 Baroonba Street, Whitebridge NSW 2290
Price
Contact agent
18 Ransley Street, Penrith NSW 2750
Perle, East Side Quarter, Penrith - 18 Ransley Street, Penrith
18 Ransley Street, Penrith NSW 2750
Price
Contact agent
Ernest Cavanagh Street, Gungahlin ACT 2912
Raya, Gungahlin - Ernest Cavanagh Street, Gungahlin
Ernest Cavanagh Street, Gungahlin ACT 2912
Price
Contact agent
39 Browning Street, South Brisbane QLD 4101
39-41 Browning Street, South Brisbane - 39 Browning Street, South Brisbane
39 Browning Street, South Brisbane QLD 4101
Price
Contact agent
675 Gardeners Road, Mascot NSW 2020
Kiara North, Mascot - 675 Gardeners Road, Mascot
675 Gardeners Road, Mascot NSW 2020
Price
Contact agent
187 Salvado Road, Jolimont WA 6014
Jolie, Jolimont - 187 Salvado Road, Jolimont
187 Salvado Road, Jolimont WA 6014
Price
Contact agent
47 Maning Avenue, Sandy Bay TAS 7005
Grace Residences - 47 Maning Avenue, Sandy Bay
47 Maning Avenue, Sandy Bay TAS 7005
Price
Contact agent
Cove Lane, Narooma NSW 2546
Cove, Narooma - Cove Lane, Narooma
Cove Lane, Narooma NSW 2546
Price
Contact agent
52-56 Ramsay Street, Five Dock NSW 2046
Ava, Five Dock - 52-56 Ramsay Street, Five Dock
52-56 Ramsay Street, Five Dock NSW 2046
Price
Contact agent
2375 Gold Coast Highway, Mermaid Beach QLD 4218
The Alfred - 2375 Gold Coast Highway, Mermaid Beach
2375 Gold Coast Highway, Mermaid Beach QLD 4218
Price
Contact agent
129-131 Russell Ave, Dolls Point NSW 2219
ALLURE COLLECTION - 129-131 Russell Ave, Dolls Point
129-131 Russell Ave, Dolls Point NSW 2219
Price
Contact agent
62 Constitution Avenue, Parkes ACT 2600
The Eastbourne on Commonwealth Park - 62 Constitution Avenue, Parkes
62 Constitution Avenue, Parkes ACT 2600
Price
Contact agent
155 Old Burleigh Road, Broadbeach QLD 4218
Sandpiper, Broadbeach - 155 Old Burleigh Road, Broadbeach
155 Old Burleigh Road, Broadbeach QLD 4218
Price
Contact agent
33 Vulture Street, West End QLD 4101
33 Vulture Street, West End QLD 4101
33 Vulture Street, West End QLD 4101
Price
Contact agent
19 Governor Terrace, Murarrie QLD 4172
Park Hill Village Collection, Murarrie - 19 Governor Terrace, Murarrie
19 Governor Terrace, Murarrie QLD 4172
Price
Contact agent
122 Marine Parade, Miami QLD 4220
Nalu, Miami - 122 Marine Parade, Miami
122 Marine Parade, Miami QLD 4220
Price
Contact agent
34 Jacaranda Place, Indooroopilly QLD 4068
34 Jacaranda Place, Indooroopilly QLD 4068
34 Jacaranda Place, Indooroopilly QLD 4068
Price
Contact agent
167 Old Burleigh Road, Broadbeach QLD 4218
167 Old Burleigh Road, Broadbeach QLD 4218
167 Old Burleigh Road, Broadbeach QLD 4218
Price
Contact agent
21 Queens Way, Yeerongpilly QLD 4105
Yeerongpilly Green - 21 Queens Way, Yeerongpilly
21 Queens Way, Yeerongpilly QLD 4105
Price
Contact agent
445-449 River St, Ballina NSW 2478
Solhaven - 445-449 River St, Ballina
445-449 River St, Ballina NSW 2478
Price
Contact agent
52 Sunset Boulevard, Surfers Paradise QLD 4217
52 Sunset Boulevard, Surfers Paradise QLD 4217
52 Sunset Boulevard, Surfers Paradise QLD 4217
Price
Contact agent
6 Jack Brabham Drive, Hurstville NSW
Horizon Hurstville - 6 Jack Brabham Drive, Hurstville
6 Jack Brabham Drive, Hurstville NSW
Price
Contact agent
49 Seena Drive, Edgeworth NSW 2285
49 Seena Drive, Edgeworth NSW 2285
49 Seena Drive, Edgeworth NSW 2285
Price
Contact agent
Lot 118 Ocean Steamers Road, Port Adelaide SA 5015
Lot 118 Ocean Steamers Road, Port Adelaide SA 5015
Lot 118 Ocean Steamers Road, Port Adelaide SA 5015
Price
Contact agent
203 Ashmore Road, Benowa QLD 4217
203 Ashmore Road, Benowa QLD 4217
203 Ashmore Road, Benowa QLD 4217
Price
Contact agent
774 Ripley Road, Ripley QLD 4306
774 Ripley Road, Ripley QLD 4306
774 Ripley Road, Ripley QLD 4306
Price
Contact agent
6 Homelea Court, Rivervale WA 6103
6 Homelea Court, Rivervale WA 6103
6 Homelea Court, Rivervale WA 6103
Price
Contact agent
7002 Ripley Road, Ripley QLD 4306
7002 Ripley Road, Ripley QLD 4306
7002 Ripley Road, Ripley QLD 4306
Price
Contact agent
3 Delos Way, Sorrento WA 6020
3 Delos Way, Sorrento WA 6020
3 Delos Way, Sorrento WA 6020
Price
Contact agent
77 Sutton Street, Redcliffe QLD 4020
77 Sutton Street, Redcliffe QLD 4020
77 Sutton Street, Redcliffe QLD 4020
Price
Contact agent
181 Prospect Road, Prospect SA 5082
181 Prospect Road, Prospect SA 5082
181 Prospect Road, Prospect SA 5082
Price
Contact agent
593-595 Albany Highway, Victoria Park WA 6100
593-595 Albany Highway, Victoria Park WA 6100
593-595 Albany Highway, Victoria Park WA 6100
Price
Contact agent
1-28, 40 Civic Way, Rouse Hill NSW 2155
1-28, 40 Civic Way, Rouse Hill NSW 2155
1-28, 40 Civic Way, Rouse Hill NSW 2155
Price
Contact agent
93-97 Bay Street, Brighton VIC 3186
93-97 Bay Street, Brighton VIC 3186
93-97 Bay Street, Brighton VIC 3186
Price
Contact agent
1F Ashline Street, Wollert VIC 3750
1F Ashline Street, Wollert VIC 3750
1F Ashline Street, Wollert VIC 3750
Price
Contact agent
119 Queen Street & 86 King Street, Bendigo VIC 3550
119 Queen Street & 86 King Street, Bendigo VIC 3550
119 Queen Street & 86 King Street, Bendigo VIC 3550
Price
Contact agent
22-38 & 27-31 The Avenue, Coburg VIC 3058
22-38 & 27-31 The Avenue, Coburg VIC 3058
22-38 & 27-31 The Avenue, Coburg VIC 3058
Price
Contact agent
1260-1272 Malvern Road, Malvern VIC 3144
1260-1272 Malvern Road, Malvern VIC 3144
1260-1272 Malvern Road, Malvern VIC 3144
Price
Contact agent
472 Regency Road, Prospect SA 5082
472 Regency Road, Prospect SA 5082
472 Regency Road, Prospect SA 5082
Price
Contact agent
273A Gorge Road, Paradise SA 5075
273 Gorge Road, Paradise SA 5075 - 273A Gorge Road, Paradise
273A Gorge Road, Paradise SA 5075
Price
Contact agent
270 The Esplanade, Miami QLD 4220
270 The Esplanade, Miami QLD 4220
270 The Esplanade, Miami QLD 4220
Price
Contact agent
5 Charles Street, Charlestown NSW 2290
5 Charles Street, Charlestown NSW 2290
5 Charles Street, Charlestown NSW 2290
Price
Contact agent
208 Meadowlands Road, Carina QLD 4152
208 Meadowlands Road, Carina QLD 4152
208 Meadowlands Road, Carina QLD 4152
Price
Contact agent
27-29 Dethridge Street, Northgate QLD 4013
27-29 Dethridge Street, Northgate QLD 4013
27-29 Dethridge Street, Northgate QLD 4013
Price
Contact agent
Lot 100 Maryvale Road, Athelstone SA 5076
Lot 100 Maryvale Road, Athelstone SA 5076
Lot 100 Maryvale Road, Athelstone SA 5076
Price
Contact agent