RBA can’t save us from the political deal

The chattering elites are calling on the RBA to “do something” as more than half the population remains in lockdown but what we need from the central bank now is policy stability.

Reserve Bank of Australia governor Philip Lowe. Picture: James Brickwood.

Don’t expect the Reserve Bank to bail the state premiers – or indeed the federal government – out of their, the premiers of course, urge to lock down and so also the consequences of their lockdowns.

At its most fundamental, the RBA can’t anyway; despite the rather bizarre meme that has developed among so called experts – the chattering elites – that the RBA should just “do something”.

As if cutting its official interest rate from all-but zero at 0.1 per cent to actual zero, or even indeed into the negative would cause people to rush out and spend in shops and restaurants.

Oh right, they can’t actually do that: well more than half the 26m Australians are prohibited by their state governments from doing exactly that.

Or do these idiots expect we can punt on a “toilet roll-led recovery” from the recession that the premiers of Victoria and NSW have imposed on the entire country - if only the RBA marginally cut mortgage repayments? That as a consequence people would rush to spend so much more in the permitted supermarkets (and bottle shops)?

That’s if, of course, the banks actually passed on the rate cut anyway. And does anyone think – if they actually were able to think about it – that moving to negative interest rates on deposits would really do wonders for consumer spending?

Because that is exactly the consequence of the RBA moving its official rate negative – and adjusting all the other rates in line with that. There are two broad critically linked points to be made about all this.

Reserve Bank of Australia governor Philip Lowe. Picture: James Brickwood.

One is what the RBA sees as the developing economic environment through to the end of the year and into 2022; and so what it should do with the policy instruments it has, including the more esoteric issues around its intended trimming of its QE bond-buying from $5bn to $4bn a week. The second and far more relevant is the ‘deal’ at the so-called national cabinet between the federal and state governments around the vaccination/lockdown mix through to the end of the year.

The Feds OK’d “go early, go hard”, supposedly short, snap, lockdowns at any Covid breakout while promising to pick up 100 per cent of the tab for JobKeeper Version 2.3 payments to workers and going 50-50 with individual states on support directly to battered businesses.

The Feds set the JobKeeper payment; the states implicitly set the level of the business payments.

This is to apply until we hit the 70/80 vaccination levels; after that lockdowns are ruled out.

Now, there’s as much chance of lockdowns ending, as there is of Chairman Dan and Premier Gladys swapping hysterias and indeed literally swapping positions. But that’s an issue for October-November. Right now, in August and into September, more money into the hands of battered workers and businesses is a matter for the premiers and the Feds.

It’s their deal; ask them to step up; don’t ask the RBA and it couldn’t be very effective anyway.

Yes, the RBA does come right back into the picture when we get into that post-vaccination future. If indeed we ever do.

The RBA’s mindset remains that if the deal holds – if we do get to a November –December, where we are “fully” vaccinated and lockdowns are abandoned – the economy should spring back at least as strongly as it did last year from the initial June quarter national lockdown. But if its’s wrong – about either the expected spring-back in a vaccinated no-lockdown future, or, that premiers are still resorting to lockdowns – it will be reassessing its expected policy dynamics.

Importantly, it is reassessing continually in real-time all the time anyway. Right now what I want from the RBA – and I suggest you should as well – is policy stability not pointless and actually seriously damaging gestures.

Originally published as RBA can’t save us from the political deal