The GFC §

2008-2009 §

Reasons why expansioanry monetary policy ineffective post-GFC §

Existing Private Setor debt §

Greater Borrowing Prior to GFC §

• Australian Households increased their borrowing from the mid-1990s to the mid-2000s.
  • As a result of easy access to finance, attractive real interest rates, and booming property gains.
• Household debt increased from 40% of GDP to >120% of GDP, in only 15 years.

Onset of GFC impact on Household Borrowing §

• After GFC households and businesses took on less risk.
  • They paid back debts, often cutting spending elsewhere

This reduction in spending reduces Consumption / Investment, thereby contributing to the Stagnant Growth

Wages & Earnings §

Stagnant Wage Growth Post-GFC.

• Even though Unemployment Rate approached Natural Rate of Full Employment;
  • There was still excess capacity due to Underemployment.
  • Meaning existing workers were less likely to bargain for wage rises.

Exchange Rate §

A High Exchange Rate driven by;

• Early Decade high commodity prices, (Favourable Terms of Trade)
  • (due to mining boom maybe?)
• Comparatively higher Interest rates than other countries
  • Leading to Capital Inflow A High Exchange rate reduces International Competiveness.
• “This could have counteracted low interest rates and slowed growth” < this seems contradictory (source)

2019 §

• Continued Low Interest Rates signal the economy is not doing well
  • Less borrowing due to perceived risk and uncertainty
• World Economic Conditions improve globally
  • Higher growth rates
  • Small Rises in Inflation
  • Increased Industrial Production
• February 2020; Phillip Lowe (governer of RBA), stated;
  • “The Australian economy had reached a gentle turning point, with growth expected to pick up from an average rate of 2 percent over 2018-19 to 2.75 percent in 2020, and 3 percent in 2021”

The Contemporary Period §

2020 §

• In March of 2020 the RBA introduced Expansionary Policy Measures, as well as some M9 - Unconventional Monetary Policy, including;
  • Quantitative Easing
    • worth $63b in bonds from the Secondary Market
  • Term Funding Facility
  • Forward Guidance
  • Changes to Interest Rates on Exchange settlement accounts
• Reduction in Cash Ratel
  • from 0.75 percent at the beginning of 2020
  • to 0.1% by the November RBA board meeting.
• Extended Quantitative Easing by November of 2020
  • Plan to buy $100b of longer-dated 5-10 year Commonwealth and State Government Bonds over six months.
• Planned to maintain the 0.1 per cent cash rate for 3 years, until they see evidence of;
  • 2-3% Target Rate of Inflation;
  • Wage Growth, and;
  • A Tighter Labour Market

2022 §

[!Monetary-Policy]- Monetary Policy Decision, May 2022 (source) At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 35 basis points. The Board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic. The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wagés growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.

The resilience of the Australian economy is particularly evident in the labour market, with the unemployment rate declining over recent months to 4 per cent and labour force participation increasing to a record high. Both job vacancies and job ads are also at high levels. The central forecast is for the unemployment rate to decline to around 3% per cent by early 2023 and remain around this level thereafter. This would be the lowest rate of unemployment in almost 50 years.

The outlook for economic growth in Australia also remains positive, although there are ongoing uncertainties about the global economy arising from: the ongoing disruptions from COVID-19, especially in China; the war in Ukraine; and declining consumer purchasing power from higher inflation. The central forecast is for Australian GDP to grow by 4% per cent over 2022 and 2 per cent over 2023. Household and business balance sheets are generally in good shape, an upswing in business investment is underway and there is a large pipeline of construction work to be completed. Macroeconomic policy settings remain supportive of growth and national income is being boosted by higher commodity prices.

Inflation has picked up significantly and by more than expected, although it remains lower than in most other advanced economies. Over the year to the March quarter, headline inflation was 5.1 per cent and in underlying terms inflation was 3.7 per cent. This rise in inflation largely reflects global factors. But domestic capacity constraints are increasingly playing a role and inflation pressures have broadened, with firms more prepared to pass through cost increases to consumer prices. A further rise in inflation is expected in the near term, but as supply-side disruptions are resolved, inflation is expected to decline back towards the target range of 2 to 3 per cent. The central forecast for 2022 is for headline inflation of around 6 per cent and underlying inflation of around 4% per cent; by mid 2024, headline and underlying inflation are forecast to have moderated to around 3 per cent. These forecasts are based on an assumption of further increases in interest rates.

Tl;DR; Numerous Factors influenced the May 2022 RBA Decision;

• Pandemic Brought Supply chain interruptions leading to supply-side inflationary pressure.

• Pandemic Recovery released savings that people had previously been unable to spend.

  • Leading to a growth in Global Demand
  • Stimulatory Policy, further increases Demand Globally

• The RBA ceased bond purchasing in early 2022.

  • RBA allowed it’s bonds to expire at maturity instead of re-selling them again on the Secondary Market
  • RBA is on the lookout for wage pressures

• Unemployment rate has driven down to 3.4%, lowest in sixty years.

2023 §

• Increases in the Cash Rate
  • From 3.35 in February
  • To 4.10% in September
• Tight Labour Market
  • We are beyond Full Employment
  • Unemployment Rate = 3.7% in July, unchanged from January.
    • RBA foresees constriction of demand as a result of Increased Interest Rates, possibly leading to Labour Market decline.
• Slight Inflation Decline
  • From 7.8% in December of 2022
  • To 6% in June of 2023