Tim Wilson (Goldstein, Liberal Party) Share this | Hansard source

On behalf on the Standing Committee on Economics I present the committee's report entitled Review of the Reserve Bank of Australia annual report 2018, second report, together with the minutes of proceedings.

Report made a parliamentary paper in accordance with standing order 39(e)

by leave—After a long period of interest rate stability, the Reserve Bank of Australia lowered the cash rate in June and July 2019 to one per cent. Commenting on the decision to leave rates on hold in August 2019, the governor said the RBA:

… judged that after having moved twice in quick succession it was appropriate to wait and assess developments both internationally and domestically.

These two reductions by the RBA were scrutinised at length at the committee's public hearing on 9 August 2019. The governor said the RBA expects growth in the Australian economy to strengthen gradually, with the RBA's central scenario forecasting GDP growth of around 2.5 per cent over 2019 and 2.75 per cent over 2020. I need to note those were statements at the time. Obviously, events since have raised questions about those projections. This outlook, the governor commented, is being supported by 'the low level of interest rates, recent tax cuts, ongoing spending on infrastructure, signs of stabilisation in some housing markets and a brighter outlook for the resources sector.'

However, the governor also identified that Australia is vulnerable to economic headwinds from the global economy, in particular the ongoing trade and technology dispute between the United States and China. The governor remarked that the dispute has disrupted trade flows, resulted in business investments being postponed or reconsidered, increased volatility in financial markets and has increased the likelihood of other central banks reducing their rates.

Inflation remains low in the Australian economy, and underlying inflation has been below two per cent for around three years. CPI inflation was 1.6 per cent in June 2019 and is forecast to lift gradually to around two per cent by 2021.

The governor defended the effectiveness of the RBA's inflation target, which aims to keep CPI inflation between two and three per cent, on average, over time. He noted that recent inflation data suggests that there has been more spare capacity in the economy than previously thought and the Australian economy can have a lower unemployment rate without producing inflation pressures. Consequently, the RBA has revised down its estimate of the non-accelerating rate of unemployment, or the NAIRU, an indicator of full employment, from five per cent to 4.5 per cent. The governor commented that 'the economy has generated a huge number of extra jobs, and the employment-to-population ratio has never been higher in Australia than it is right now.'

Despite this, within only three months, the RBA reduced the cash rate further to a historical low of 0.75 per cent in October 2019. Commenting on the decision to keep rates on hold at 0.75 per cent in November 2019, the governor said that the RBA board 'is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.' After three relatively quick reductions in interest rates, the efficacy of monetary policy is being publicly brought into question, including by myself.

In answers to questions on notice to another inquiry, the committee found that, following the June and July interest rate cuts, between 0.4 and seven per cent of the big four banks' principal and interest mortgage holders actively requested a reduction in their interest repayments. By comparison, the overwhelming majority of customers passively accepted higher principal repayments. This data suggests that the benefits of interest rate cuts according to economic theory are not necessarily being realised in practice.

Similarly, the data also showed that the impact for interest-rate-bearing depositors was immediate and real. While low interest rates may encourage some people to borrow and invest, low rates reduce interest income for others. Many Australians, particularly those relying on interest-bearing deposits for their income, have been negatively affected by persistently low interest rates and further reductions in the cash rate in June, July and October of last year.

The RBA's rate cuts also sit against a global backdrop where currency effects appear to be a core motivation for monetary policy decisions. As Governor Lowe rightly cautioned foreign central bankers at a conference in Jackson Hole, Wyoming, last year:

… if all central banks ease similarly at around the same time, there is no exchange rate channel: we trade with one another, not with Mars.

The committee will continue to hold the RBA to account, including this Friday at our next hearing, for the effects of its rate decisions on all Australians and the Australian economy, as well as the emerging discussion surrounding unconventional monetary policy options as global interest rates may head towards zero.

During the global financial crisis, the RBA used a form of unconventional monetary policy through expanding the repayment terms of funding for banks to increase liquidity. That decision was made in the face of a temporary liquidity crisis. The challenges facing Australia's economy today are neither temporary nor as a result of liquidity. The challenges are structural.

If enacted, quantitative easing would be one of the most significant economic decisions made since floating the Australian dollar. We acknowledge and accept the right of the RBA to independently set monetary policy, but this does not render them immune to scrutiny. Monetary policy is currently determined independent of the government and the parliament. The independence of the RBA obliges parliamentarians to scrutinise their decisions on behalf of Australians as part of their core representative function. This justifies heightened scrutiny on the preparation of any measures for consideration by the RBA, the decision pathway for their use, their practical implementation and their efficacy, particularly with unconventional monetary policy.

In answers to questions on notice posed by the committee, the RBA outlined that unconventional monetary policy options range from purchasing government securities to providing longer term funding to banks to support credit creation to purchasing private-sector assets such as mortgage-backed securities and foreign exchange intervention.

Through speeches and interactions with the media, the RBA has continued to familiarise Australians with its thinking on potential unconventional monetary policy approaches. The practical consequences of these approaches should be considered. Recently, former RBA board member Warwick McKibbin warned that QE is corrosive to capitalism itself through the misallocation of capital and may reduce business investment in innovation, decreasing their long-term viability.

A 2018 study from Wei Cui and Vincent Sterk from the University College London concluded that QE 'come with strong side effects on inequality, which can substantially lower social welfare'. This analysis is backed up by 2018 Congressional Budget Office data, which shows that from the start of the Federal Reserve's QE program until 2014 in the context of it the global financial crisis, average income growth before taxes were stable or declined for low- and middle-income earners while it increased markedly for high-income earners. Disturbingly, the study finds that within the highest quintile income was highly skewed towards the very top of the distribution, mostly through the increased pricing of assets and stabilisation of their prices. In practice, QE acts as a wealth transfer through asset price inflation from the young, who are trying to get ahead, towards those who are already established, exacerbating existing issues of intergenerational equity.

At an economy wide level, the benefits are also dubious. Stephen Roach from Yale University concluded the US QE 'payback was disappointing', highlighting that over the six years form November 2008 successive QE programs added $6.3 trillion to the Fed balance sheet, which amounted to nearly 25 per cent more than the $2.9 trillion expansion of nominal GDP over the same period. In fact, for every dollar of QE, you got less of your dollar back.

In a recent speech, the RBA governor dampened down expectations that they would adopt QE. He observed Australia's financial markets were operating normally and our financial institutions were able to access funding on reasonable terms, so QE to address liquidity is unjustified. The RBA governor outlined he has no appetite to undertake outright purchase of private sector assets such as part of a QE program and the only option they would consider would be to purchase government bonds to lower risk-free interest rates along the yield curve with effects on the exchange rate. In that context, the RBA governor outlined such a scenario would be considered at a cash rate of 0.25 per cent but not before that. Consequently, the committee has an amplified responsibility to closely scrutinise any rate cut because of the cascading consequences to licence QE. On that basis, I welcome the decision only yesterday not to cut rates.

In his speeches and in other public remarks, the RBA governor has outlined the options available to Australia—monetary policy, fiscal policy and structural reform. In doing so, much of the discussion has focused on the progressive exhaustion of monetary policy. Media commentary of the RBA governor's speeches appear to have an overweighted focus on his remarks on fiscal policy—and I might note that continues even this year—without recognising his regular reflections on capital constraints, notably in infrastructure. Obsessing over high-GI spending that increases public debt for an economic sugar hit is not sustainable, despite its periodic advocacy by some people in this House.

More emphasis needs to be put on the RBA governor's commentary on the potential of low-GI structural reform that yields long-term results, encourages business investments and would aid in the progressive expansion of the economy to the benefit of the Australian people through jobs. The options are manifest from further broadening and flattening of the tax base, reforming litigation funding models, the grounds for shareholder class actions and the application of responsible lending laws that can all foster unnecessary costs and risks as well as many other measures. The RBA governor has also outlined it is not clear the experience with negative interest rates has been a success, outlining the risks of a reversal interest rate—that is, the interest rate at which lower rates become contractionary rather than expansionary—and there is a confidence we are still a fair way from it.

The answers provided from the banks to the committee on the stimulatory effects of interest rate cuts at such low levels backs up the RBA governor's statements, narrowly. But at these levels reducing interest rates for stimulus appears to be equivalent to tapping an empty well—that is, there may technically be shallow puddles of water still at the bottom, but it would be more effective and sustainable to look for alternative sources of water.

The committee notes that on 5 November 2019 the Treasurer, the Hon. Josh Frydenberg PM, announced that the current statement on the conduct of monetary policy would remain unchanged. This continues the September 2016 agreement between the Treasurer and the governor of the Reserve Bank that an appropriate goal is to keep consumer price inflation between two and three per cent. On average, over time, it's the government's view that this provides continuity and consistency at a time of global economic uncertainty.

On behalf of the committee I would like to thank the governor of the Reserve Bank, Dr Philip Lowe, and other representatives of the RBA for appearing at the hearing on 9 August 2019. I'd also, of course, like to thank the committee members and the secretariat, who ably assisted at every point in the task and duty of the committee. And I know at times I can be a challenging chair! The committee will scrutinise the RBA at further public hearings this Friday 7 February and Friday 14 August 2020, and I very much look forward to scrutinising every decision the RBA makes, as I'm sure the opposition does as well, on behalf of the Australian people. I commend the report to the House.

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