RBA’s monetary and fiscal fusion
In the AFR today I write that Reserve Bank of Australia governor Phil Lowe’s greatest legacy will be the fusion he has forged between fiscal and monetary policy since the emergence of the global pandemic in March. Coupled with the government’s stunning success in effectively eradicating the virus, this has resulted in Australia significantly outperforming the rest of the world. Excerpt only below:
Prior to the emergence of what Lowe openly describes as “Team Australia”, there had been a striking friction between the two major economic policy levers. On the one hand, Martin Place wanted to drive down Australia’s stubbornly sticky jobless rate to the circa 4.25 per cent level that would precipitate some overdue wages growth that would in turn boost inflation back into the RBA’s desired target band.
Yet it was getting no help at all from fiscal policy, which was being (appropriately) forced into a contractionary surplus by a characteristically parsimonious Scott Morrison and his successor as Treasurer, Josh Frydenberg. At the time, the Morrison government’s aim was to ensure it was building sufficient fiscal “space” (ie, insurance) such that it could unleash massive stimulus in the event that a future crisis materialised.
This was also rationalised by the observation that the conventional ammunition available to our monetary policy mandarins had been heavily depleted. Put more precisely, the cash rate in 2019 was approaching the RBA’s assessment of its effective lower bound.
From Lowe’s vantage, however, an overzealous political commitment to a surplus was redundant when more Aussies than necessary were out of work. That is, we were not at “full employment” and fiscal policy could, at the margin, have furnished more synergistic support.
And while there was a case that the RBA could have launched unconventional policy measures (aka quantitative easing), Lowe was clearly exercised by the financial stability risks of doing so after regulators had just burst a burgeoning housing bubble in 2017.
Lowe therefore embarked on a bold campaign to jawbone the feds into loosening their purse strings, which was a conflicting policy narrative that was not well-received by decision-makers in Canberra, who were hell-bent on delivering a long-awaited surplus.
And yet Lowe’s rhetoric around the need for fiscal policy to do more heavy-lifting laid the essential foundations for what has unfolded since COVID-19. It is indeed ironic that the RBA—through its relentless communications program driven by Lowe and his deputy governor, Guy Debelle—has offered the public many more powerful defences of the federal and state governments’ record budget deficits than the politicians have done themselves. The RBA has also been responsible for intellectually coercing the otherwise recalcitrant states to embrace a “go fast and go hard” fiscal response strategy, which has been no small feat given the states have been fearful of losing their prized credit ratings.
Only a few days ago Victoria’s premier Dan Andrews advised viewers of Channel Ten's The Project that he was “doing what the Governor of the Reserve Bank of Australia has told us to do, [to] get on and spend, create energy and momentum, and get that spark back into the Victorian economy”.
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