Monetary policy soon in focus.

At the Reserve Bank of Australia’s December meeting…

“The Board concluded that the most appropriate approach would be to maintain the current stance of monetary policy and to continue to assess the evidence of how the easing in monetary policy was affecting the economy. Members agreed that it would be important to reassess the economic outlook in February 2020, when the Bank would prepare updated forecasts. As part of their deliberations, members noted that the Board had the ability to provide further stimulus to the economy, if required. Members also agreed that it was reasonable to expect that an extended period of low interest rates would be required in Australia to reach full employment and achieve the inflation target. The Board would continue to monitor developments, including in the labour market, and was 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.” RBA Meeting Minutes, 3 December 2019.

Fiscal inaction defaults to monetary mismanagement.

The minutes are continuing evidence of the Government’s redolent expectation that the RBA should do all of the heavy lifting to stimulate the economy, i.e., keep the cash rate low.

low rates for longer.JPG

Problem is that this is not sustainable and the RBA is not mandated to blow asset bubbles even if the Government is comatose. Nonetheless, this is what Australia’s monetary accommodation DEFCON scale looks like today:

  • DEFCON 3 - low interest rates for longer (we’re already here).

  • DEFCON 2 - even lower interest rates (maybe February, and quite possibly exacerbated by the devastating eastern seaboard wildfires).

  • DEFCON 1 - quantitative easing, or QE.

Whether we get to DEFCON 1 in Australia will depend on what happens in other parts of the world (i.e., the U.S. in particular) and whether or not any Fiscal Viagra materialises to obviate the inevitable folly of money printing.

Whilst it looks like we will get to DEFCON2 in 2020, I sincerely hope we don’t go anywhere near DEFCON1, but if we do we’ll be watching a very familiar cartoon.

I think there’s more reality in The Simpsons.

Mike.

NextLevelCorporate is a leading financial & strategic corporate advisory firm with a multi-decade track record that speaks for itself. Helping clients in all industries to prepare for, respond to and deliver transformative corporate finance strategies and transactions in and out of Australia, is our passion.

Michael Ganon