Bill Evans, long time RBA twitcher, is harbouring some doubts (click link) about the wisdom of the RBA Board cutting the target rate further next Tuesday.

What’s up Bill?

Why are you suddenly talking about households buried in debt and the mountain of foreign debt (“external liabilities” if the word debt is a bit strong and you prefer to see something shiny when strolling through the paddocks).

Are you trying to scare the smashed avocado munchers (the ones like Bernard who can munch with abandon not guilt)?

Anyways this attack of bats from Bill’s belfry attracted some comments at regular Glass Pyramid leaning post – Macrobusiness – and they are reproduced below for your enjoyment

COMMENT 1

Bill seems to have heard a penny falling in a forest.

A whole range of ideas in that post that Bill usually dodges.

Cutting rates driving household debt to record highs post GFC. A concern that cutting rates further will just make that situation worse.

Be still my beating heart!

Houses and Holes gave some advice to Bill.

“…What you are better off campaigning for, Bill, is much tighter macroprudential policy to accompany the cuts…”

The problem with that recommendation is that it needs to be clearer and let Bill know that the MP Bill should be campaigning for is for APRA to direct the local ADIs to wind down their use of offshore wholesale lending to support mortgage lending where the security is existing rather than new property.

That explicit advice would result in

1. Higher mortgage rates for the existing property asset price speculators

2. Lower mortgage rates for new construction.

3. A lower exchange rate.
Though it preferable that any offshore lenders who want a taste of Aussie property do so directly via RMBS and not via the ADIs.

Just cutting teh rates without the above recommendation to APRA will result in a higher $AUD as the banks increase their reliance on NIRP/ZIRP capital to allow them to pass on the RBA target rate cuts.

It is no coincidence that when the RBA started cutting rates in 2013 that the external liabilities of the ADIs took off again with APRA watching quietly.

Keep in mind that if the RBA target rate was the only determinant of mortgages rates there wouldn’t need to be any offshore wholesale borrowing at all.

If Bill succeeds in convincing APRA that would be about $600B less offshore debt whose rolling over keeps the $AUD significantly higher than it should be.

COMMENT 2

December 2, 2016 at 9:27 am

“…admit its only tool is limp to do anything…”

Yes – I think that realisation is finally dawning for Bill (along with lots of other people – possibly including the RBA but their track record for admitting error is not great).

Year after year we have had people calling for the RBA to cut rates without any real discussion of why the last cuts (and all those ones before those) did not work or why they stopped ‘working’.

It is a pretty obvious question to be asking – why does the demand for credit continue to decline after the price for credit has been lowered? If additional demand for credit can only be stimulated by further price reductions what is that telling us?

Had those questions been asked about 5 (or preferably 20) years ago we may have worked out the flaws in the current RBA/APRA centred monetary model and been well on the way to a better approach to regulation of the public monetary system.

There are plenty of alternatives but there is zero discussion of them in Australia.

Instead we are in the position of having watched other countries pursue failed policies to ZIRP and NIRP and without any real reflection continue to march on in their tracks.

It is good to see some doubts creep into Bill’s thinking but it has taken a looooooooog time to get there.