RBA’s monetary and fiscal fusion

Christopher Joye

Coolabah Capital

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”.

Read the full column here.

Investment Disclaimer Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting www.coolabahcapital.com. Neither Coolabah Capital Investments Pty Ltd, EQT Responsible Entity Services Ltd (ACN 101 103 011), Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Institutional Investments Pty Ltd holds Australian Financial Services Licence No. 482238 and is an authorised representative #001277030 of EQT Responsible Entity Services Ltd that holds Australian Financial Services Licence No. 223271. Equity Trustees Ltd that holds Australian Financial Services Licence No. 240975. Forward-Looking Disclaimer This presentation contains some forward-looking information. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what Coolabah Capital Investments Pty Ltd believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.

Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs over $8 billion with a team of 40 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.


Sign In or Join Free to comment