RBA making it up as it goes along

After a speech by Assistant RBA Governor Michele Bullock yesterday, there is speculation about the RBA pushing APRA to instruct banks to further restrain their lending to housing investors- strengthening the so-called macro-prudential regulation that has had only limited success in cooling the property market to date (See this morning’s Australian). I now have the uneasy feeling that the RBA is making it up as it goes along, that it has lost control of macroeconomic management.

The RBA forced the cash rate to a record low to help the economy adjust to the end of the mining investment boom (see chart below). Its easy money policy certainly contributed to a dwelling investment boom, and it has also helped inflate a property price bubble in Sydney and Melbourne, a bubble which has been obvious for some time (see Sydney & Melbourne property prices defy rational explanation), but which the RBA only now appears to realise is a threat to macroeconomic stability.


The RBA should have realised the full implications of then Governor Glenn Stevens’ observation about “crazy” Sydney house prices in June 2015, almost two years ago. Now we have even more heavily indebted households, at substantial financial risk from interest rate increases, and we risk a large housing price correction and an adverse shock to consumer confidence and spending when interest rates start rising.

Australian interest rates will come under pressure to rise as the US Federal Reserve increases the Federal Funds Rate further and faster than previously expected. Morgans Chief Economist Michael Knox has an excellent analysis of the Fed’s likely interest rate hikes over 2017 in his latest note Plain speaking from Janet Yellen:

“…to stabilize the US economy at full employment (and we are now at full employment) the Fed needs to move the Fed Funds rate to 1.74%. Right now the effective Fed Funds rate is 66 basis points. The startling conclusion is that to reach the neutral Fed Funds rate, the US now needs four rate hikes. This suggests a rate hike in March, a rate hike in June, a rate hike in September and maybe a rate hike in December.

Janet Yellen is telling us that the period of pretend rate hikes is now behind us. The Fed is beginning to tighten on a regular fashion. By the end of this cycle, the Fed Funds rate should reach 3%.”

The US Federal Reserve Board is currently undertaking its two-day March meeting, over Tuesday 14 and Wednesday 15 March, so news of the March rate hike is not far away. The RBA’s macroeconomic management task will soon become even more challenging.

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6 Responses to RBA making it up as it goes along

  1. Glen says:

    Great post Gene, it would appear the RBA is being dragged into the populous position of government in not wanting any losers out of decisions it makes. House price corrections will inevitably occur as interest rates increase, as a consequence the values of some properties must fall, the longer the RBA continue to support lower rates the worse the effect in the long run. I personally think too many board members interact with the media more than is required and are losing sight of their core objective.

  2. ngruen says:

    I’ve been arguing that the RBA are flying by the seat of their pants for some time, but it seems from a different position – ie one that is critical that they didn’t lower faster and further. Had they done so, interest rates might well be rising now, which is the best way to prevent speculative bubbles from emerging.



    • Gene Tunny says:

      Yes, that’s certainly an alternative policy option that may well have been superior to what the RBA ended up doing. Thanks for the comment and the links NG.

      • ngruen says:

        What annoys me is not that the RBA has a different view from me. It’s that their analysis is completely improvised. I would have thought they should be building models to reflect on the various options. Of course they can’t answer the questions definitively, but they can help steer us and guide the debate. Instead, like the notorious ‘checklist’ I remember so well in the late 1980s they can argue pretty much anything depending on how they’re feeling. Have you seen any modelling or other rigorous discussion of this claim that cutting rates has less effect when they’re low? I’m not a close bank watcher, so it’s a genuine question, I’d be interested to see it if it exists. But I’m expecting it to be just made up as a piece of Very Serious Persononomics.

  3. Jim says:

    “I now have the uneasy feeling that the RBA is making it up as it goes along, that it has lost control of macroeconomic management.”

    They would probably argue they are being nimble, agile, and adapting to the changing circumstances. But I agree that the RBA have probably been caught with their analytical pants down….

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