The RBA's shift to worrying about financial stability could be hurting Australian wages

  • Written by Stephen Kirchner, Program Director, Trade and Investment, United States Studies Centre, University of Sydney

The Reserve Bank of Australia (RBA) is making an explicit trade-off between inflation and financial stability concerns. And this could be weighing on Australians’ wages.

In the past, the RBA focused more on keeping inflation in check, the usual role of the central bank. But now the bank is playing more into concerns about financial stability risks in explaining why it is persistently undershooting the middle of its inflation target.

In the wake of the global financial crisis, the federal Treasurer and Reserve Bank governor signed an updated agreement on what the bank should focus on in setting interest rates. This included a new section on financial stability.

That statement made clear that financial stability was to be pursued without compromising the RBA’s traditional focus on inflation.

Read more: Why the RBA needs to talk about future interest-rate policy

The latest agreement, adopted when Philip Lowe became governor of the bank in 2016, means the bank can pursue the financial stability objective even at the expense of the inflation target, at least in the short-term.

While the RBA board has explained its recent steady interest rate decisions partly on the basis of risks to financial stability, this sits uneasily with what the RBA otherwise has to say about underlying fundamentals of our economy.

It correctly blames trends in house prices and household debt on a lack of supply of housing, and not on excessive borrowing. These supply restrictions amplify the response of house prices to changes in demand for housing. RBA research estimates that zoning alone adds 73% to the marginal cost of houses in Sydney.

Restrictions on lending growth by the Australian Prudential Regulation Authority since the end of 2014 have been designed to give housing supply a chance to catch-up with demand and to maintain the resilience of households against future shocks.

The RBA argues that it needs to balance financial stability risks against the need to stimulate the economy through lower interest rates. But this has left inflation running below the middle of its target range and helps explain why wages growth has been weak.

Read more: Why New Zealand can't outsource employment policy to its central bank

The official cash rate has been left unchanged since August 2016, the longest period of steady policy rates on record. The fact that inflation has undershot its target of 2-3% is the most straightforward evidence that monetary policy has been too restrictive.

While long-term interest rates in the US continue to rise, reflecting expectations for stronger economic growth and higher inflation, Australia’s long-term interest rates have languished.

Australian long-term interest rates are below those in the US by the largest margin since the early 1980s. This implies the Australian economy is expected to underperform that of the US in the years ahead.

Inflation expectations (implied by Australia’s long-term interest rates) have been stuck around 2% in recent years, below the Reserve Bank’s desired average for inflation of 2.5%.

Financial markets can be forgiven for thinking the RBA will not hit the middle of its 2-3% target range any time soon. The RBA doesn’t believe it will either, with its deputy governor Guy Debelle repeating the word “gradual” no less than 12 times in a speech when describing the outlook for inflation and wages.

Inflation has been below the midpoint of the target range since the December quarter in 2014. On the RBA’s own forecasts inflation isn’t expected to return to the middle of the target range over the next two years.

The Reserve Bank blames low inflation on slow wages growth, claiming in its most recent statement on monetary policythat “labour costs are a key driver of inflationary pressure”. But this is putting the cart before the horse.

In fact, recently published research shows that it is low inflation expectations that are largely to blame for low wages growth.

Workers and employers look at likely inflation outcomes when negotiating over wages. These expectations are in turn driven by perceptions of monetary policy.

Read more: Should banks be compelled to pass on interest rate cuts?

Below target inflation makes Australia less resilient to economic shocks, not least because it works against the objective of stabilising the household debt to income ratio. Subdued economic growth and inflation also gives the economy a weaker starting point if and when an actual shock does occur, potentially exacerbating a future downturn.

When the RBA governor and the federal treasurer renegotiate their agreement on monetary policy after the next election, the treasurer should insist on reinstating the wording of the 2010 statement that explicitly prioritised the inflation target over financial stability risks.

If the RBA continues to sacrifice its inflation target on the altar of financial stability risks, inflation expectations and wages growth will continue to languish and the economy underperform its potential.

Authors: Stephen Kirchner, Program Director, Trade and Investment, United States Studies Centre, University of Sydney

Read more http://theconversation.com/the-rbas-shift-to-worrying-about-financial-stability-could-be-hurting-australian-wages-96714

Australia Today

Simple Secrets To A More Confident Smile

News Company

We all know just how important first impressions are. After a handshake, what’s one of the first things people will notice about you? It’s your smile. A friendly smile is a way of creating a friendly bond with people, letting them know you’re happy to be in their presence, and projecting a positive ...

Read more

FROM OUTCASTS TO ROCKSTARS - WHEN DID PSYCHICS BECOME SO COOL?

Ralph Tucker

With trust in organised religion and established authorities such as governments at all time low, more and more people are searching for answers from a spiritual means elevating psychics to an unprecedented level of popularity in recent years.   Rose Smith heads up Absolute Soul Secrets, the lar...

Read more

Airwallex enters awards season

Jane Stabler

On the back of employing their 100th employee globally and their Shanghai staff moving into huge new premises, Melbourne based international payments company Airwallex is continuing to ride a wave of significant growth and success, with a series of award wins and nominations recently announced. Las...

Read more

When you're sick, the support you'll get may depend on the 'worth' of your disease

Louise Stone, Clinical Associate Professor, ANU Medical School, Australian National University

Diseases low on the hierarchy of prestige are often difficult to diagnose and treat.PixabayThe name of an illness can affect the level of care a person receives. Cancer sufferers experiencing fear and uncertainty may have access to cancer care centres. Donations and bequests enable these centres to ...

Read more

Israel is prioritising PR over peace-building in the Middle East

Paul Duffill, Honorary Research Fellow, Department of Peace and Conflict Studies, University of Sydney

The opening of the US embassy in Jerusalem last week represented a major PR coup for Israel, a move the country had sought for decades. It also came hot on the heels of another celebrated Israeli PR victory – the win by Israeli singer Netta Barzilai in the hugely popular Eurovision song contes...

Read more

Holidays & Travel

More Than a Third of Australians Feel 'Too Busy' With Work to Take a Holiday

New research from InterContinental Hotel & Resorts has unveiled a large number of Australians (32 percent) are simply too busy with work to take some much-needed rest and relaxation. Almost...

Matakauri Lodge and Mahu Whenua Lodge

TRIED, TRUE AND SOMETHING NEW  A luxurious accommodation package at Matakauri Lodge + Mahu Whenua Lodge South Island, New Zealand  Available 1 May, 2018 - 30 September, 2018   Central Otago, NEW ZEALAND –...

Heaven is the Adelaide Hills

Looking for a quick getaway? Enjoy food and wine? How about stunning countryside? Look no further! The Adelaide Hills has something for everyone. We flew to Adelaide for a weekend-getaway...

5 Amazing Australian Holiday Ideas

Australia is one of the most fantastic places in the world to travel, explore, and witness all of the beauty that Mother Nature has to offer. With so much rich...

Top Amenities You Enjoy by Renting Luxury Caravans for Road Trips

Do you love to undertake road trips? What the luxury cruises on the ocean are for ocean travelers, luxury caravanning is the same for land-lubbers. Traveling in a luxury caravan...

Here Are Some Extra Reasons for You to Visit the Cayman Islands

It’s no secret that the term ‘heaven on Earth’ gets tossed around a lot. We too are tired of seeing it used for places that have sandy beaches, palm trees...

FV by Peppers: Brisbane's Hottest New Hotel

Brisbane’s hottest new hotel, FV by Peppers has officially opened its doors with Mantra Group’s Chief Operating Officer Tomas Johnsson and the Minister for Innovation and Tourism Industry Development and...

Long Island Boasts Signature Calendar of Events for Travelers in 2018

LONG ISLAND, NY (March 5, 2018) – There are many reasons to visit Long Island – New York City's Beachfront Backyard in 2018 from our most notable, the 120-miles of...

Places That Will Make You Want to Visit Indonesia This Year

Royalty, culture and history coalesce in Yogyakarta     Seasoned travellers wanting more than boutique shopping, hip bars and cutting edge restaurants are invited to try a new Indonesian island or include one...

Fashion & Beauty

Simple Secrets To A More Confident Smile

We all know just how important first impressions are. After a handshake, what’s one of the first things people will notice about you? It’s your smile. A friendly smile is...

Improve Your Body Confidence and Feel Great

No matter how good you feel about yourself, sometimes you just can’t help but see a few little flaws that seem gigantic to you and make you feel self-conscious. Whether...

First-Timer Tips For Your First Lip Filler Appointment

Getting injectable lip fillers can be a quick and effective way to plump up your smile with minimal drama. They’re a cost-effective and safe way to boost the natural shape...

The Most Common Skin Conditions and How to Deal with Them

We often underestimate the importance of our skin, but as the largest organ in our body, and our primary layer of defense, it is constantly affected by many environmental factors...

Beach Babe Basics: Everything You Need to Look Stylish at the Beach

Summer is right around the corner, and this year, we all should make the best of it. Right now, it is not just about looking stylish on the streets, it...

Easy Dress-Up Tips for Lazy Girls

Look, getting all dolled up is fun, but you may not always be in the mood for it. Unfortunately, though, this is exactly when you are asked to go to...

HEALTH

How You Can Conquer Your Dental Anxiety

Does the thought of going to the dentist fill you with dread? Well, you will be pleased to know that you are not the only one. A large number of...

Up and away: the impact of flying on your health

These school holidays, many people will take to the skies, unaware of the risks flying can pose to their health. Brisbane based house call doctor Ryan Harvey said it was important...

How to Lose Weight After 40

As you age, your metabolism slows down, which makes losing weight much harder. Additionally, your hormones start to fluctuate significantly, causing easier weight gain. Sticking to the same tricks you...

Maintaining A Healthy Lifestyle Despite A Busy Career

If you’ve been swamped at work lately and really focused on achieving that next big promotion or getting an important project completed, you may have found that your focus has...

AHRIA - Husband created a skincare range for his wife and child

Meet the Dad who was so worried about the chemicals his pregnant wife and baby were absorbing… Forget perfume or flowers… this husband created a skincare range for his wife...

Cinzia Cozzolinos shares her 7 Day Feb-Fast Detox

Nutritionist and Founder of Nutrition Darling and Smoothie Bombs shares her 7 Day Feb-Fast Detox.  Cinzia Cozzolinos Tips are below and her 7 Day Plant Based Eating Plan is...

LIFE STYLE

5 Simple Steps to Find the Right Workbenches for Sale

A workbench is a form of table that are designed for different works. These vary in size, shape and materials, yet have three common elements which are:   A tool meant for...

Oil the Sewing Machine, or Face the Dire Consequences

Sewing is an art! No art is complete without the right equipment. Sewing machine is the equipment that keeps this art alive. It is one of those machines that makes...

7 Easy Ways to Lift Up Your Home Style

House redecoration doesn’t have to be a difficult undertaking if you come up with some easy ways to lift up your home style. You just need to find solutions that...

Choosing your Water-Fed Poles: A Difficult Path Made Easy

Have you ever experienced the power of nature? No!? But, you must have seen floods or cyclones? May it be air or water, harness the power and you will have...

Keep your cool in the Far North with new 3-way fridge for the tropics

Bridging the gap that has long divided two-way and three-way refrigerator enthusiasts, Aussie Traveller’s new XCD caravan and motorhome fridge offers exceptional cooling power with the functionality of an...

Renovation Hot Spots: The Sydney Suburbs that had the biggest makeover

As Sydney’s housing boom begins to decline, ServiceSeeking.com.au looks back at the suburbs that have had the biggest makeover between 2017 and now. The find-a-tradie site has designed a map...

FOOD & DINING

Best Hidden Gem Hong Kong Restaurants

You finally find yourself enjoying the endless beauties of China and this fascinating city. In a place with so much variety, all your senses will be wide awake, and your...

JOHNNY DI FRANCESCO NAMED OFFICIAL AMBASSADOR OF EAT STREET MELBOURNE

Johnny Di Francesco, world champion pizzaiolo and owner of Melbourne’s Gradi Group of restaurants, is excited to announce he has been named official ambassador for Eat Street Melbourne 2018. As Ambassador...

The best Mother's Day gift EVER!

Whether it’s to celebrate a special occasion, or just wind down at the end of a long day, there’s nothing much better than pouring yourself a glass (or two…) of...

Sing for Your Supper at Chargrill Charlie’s

To celebrate the final curtain call of the Barden Bellas, Chargrill Charlie’s is giving you the chance to Sing for your Supper! Show off your best acapella vocals to win...

MAKE IT WINE TIME, ANY TIME

Whether it’s to celebrate a special occasion, or just wind down at the end of a long day, there’s nothing much better than pouring yourself a glass (or two…) of...

5 Food Trends That Are Affecting Your Diet in 2018

With so many changes occurring in the food industry, we can’t help but ask ourselves how can this affect our diet and everyday life, right? It’s no wonder that these...