Indeed,this behaviour continued in its response to the global financial crisis,initially lowering the official cash rate significantly less than other countries (from 7.25 to 3 per cent) but then,at what it feared was a hint of renewed inflationary pressure,it put it up again (to 4.75 per cent),only to then have to clearly admit the error of that assessment,putting it down (to 1.5 per cent for some 31 months) and,more recently,lowering it further (to 1 per cent),with still no visible stirring of inflation.
Unfortunately,the RBA came to believe its behaviour did control inflation,even though most of the global reduction in inflation rates was more the result of Chinese (and others) flooding the world with cheap imports. At best,the RBA moderated inflationary expectations during this period.
Illustration:Dionne GainCredit:
But more recently,in a complete about-face,the RBA wants to increase inflation,and has been encouraging the government to do more to stimulate the economy.
Of course,while the targeted inflation has remained flat,asset prices (homes,shares and bonds) have soured. For example,Sydney home prices basically doubled from the GFC,and shares have nearly recovered their pre-GFC peak. Household debt is now one of the highest in the world at almost 120 per cent of GDP,and nearly 200 per cent of household disposable income.
The Hayne Royal Commission drew attention to the greed of the banks that advanced a very large number of sub-prime loans by lending many more than borrowers could afford,compounded by both the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority being asleep at the wheel.
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It should be of concern that – even with falling house prices – mortgage stress and negative equity are on the rise. Further lowering interest rates,and easing lending rules,as the RBA and APRA have been doing,risks compounding the emerging debt/liquidity crisis and,against their intentions,will operate as a significant further restraint on household consumption,and therefore overall growth,and further compound the problem of asset inflation.
More broadly,the balance sheets of the G7 central banks more than tripled their pre-GFC levels as they bought government and private securities to push liquidity into the financial system,and as they pushed down interest rates. How they fix it is proving very difficult and risks fostering a major stock and market corrections.
The only precedent for this scale of central bank balance sheet expansion was during World War II,but obviously more directed at war finance rather than an attempt to stabilise aggregate demand and minimise banker and bond owner losses,as has been the intention since the GFC.
The post-war solution was strong economic growth,with central bank balance sheets declining relative to GDP,rather than by shrinkage in nominal terms. However,today,with higher aggregate debt levels in the developed world and ageing populations,average recent and prospective growth has been,and will be,much weaker.
This also implies a blurring of central bank independence,as central banks have increasingly become significant holders of government debt. Governments are beginning to threaten central bank independence. Indeed,in the US,Turkey,India,South Africa,Mexico Brazil and,of course,China,central bank independence is either under threat or non-existent.
Prime Minister Scott Morrison and Treasurer Josh Frydenberg meet RBA governor Philip Lowe at the Reserve Bank on May 22.Credit:AAP
It makes you wonder,doesn’t it,as to what was happening here in Australia when,as an early post-election stunt,Prime Minister Scott Morrison and Treasurer Josh Frydenberg “visited” the Reserve Bank governor Philip Lowe,just as he was about to lower the cash rate. This was then followed by a two-hour meeting between Frydenberg and Lowe,which resulted in the governor suddenly softening his recent positions that had called for more infrastructure spending to support our growth,to now claiming that he agreed “100 per cent with the Treasurer that the Australian economy is growing” and that our economic fundamentals are “strong”. Really?
John Hewson is a professor at the Crawford School of Public Policy,ANU,and a former Liberal opposition leader.