RBA Decision - July - HOLD 2.75% 

The RBA's monetary policy board met earlier today, and as we predicted, decided to leave the cash rate unchanged at 2.75%. As yet we cannot go into too much detail on their decision, as the full minutes of the meeting are not released for another two weeks. However, we do have the statement by Governor Glenn Stevens.

Just about everything the Governor said is to be expected, he mentions some recent volatility in financial markets overseas, some changing bond market conditions internationally, and the fact that revisions to growth estimates for the first half of the year show slightly below trend growth. The Governor notes that borrowing has been somewhat subdued, and that the unemployment rate has edged up slightly. None of these problems are particularly dire, in particular the slightly below-trend growth associated with the slowdown in mining investment is typical of such a large structural change. 

Tellingly, the Governor mentions that "inflation has been consistent with the medium-term target and is expected to remain so over the next one to two years," and that such a forecast for inflation "may provide some scope for further easing, should that be required to support demand." While the Governor mentioned that this must be considered in the context of the depreciating dollar, such statements are a clear sign that the bank still hasn't exited the easing cycle.

It is my intuition that the natural rate may be slightly above 2.75%, in line with the historical average (notwithstanding the long-run secular decline in interest rates globally over the last two decades). If this is the case, we can expect a steady return to trend growth as the structural shift away from mining investment is completed, and future rate movements may become more difficult to predict because the "inflection point" where the bank shifts from an easing cycle to a tightening cycle is often the hardest to pick. If I am wrong, (which I often am, particularly about the future), then further cuts are in order.

At any rate, we live in interesting times! More when the minutes come out. 

The Governor's speech is available here.

RBA Decision - July Meeting 

It’s the most exciting time of the month again – coming up to the first Tuesday! The Reserve Bank’s Monetary Policy board will be meeting on the coming Tuesday, 2nd of July, to make its monthly decision on interest rates. 

My prediction for this meeting is that it is likely to be a hold, implying the cash rate will stay at 2.75%. I see a low chance of a rate cut, and an even lower chance of a rate hike. In making predictions like these I think its informative to consider both the minutes of the previous meeting, and the data that has been released since that meeting. 

The minutes of the previous month’s meeting (also a hold) were broadly neutral or somewhat positive, indicating the bank’s opinion that the previous easing cycle is beginning to take hold in the real economy. The June minutes note that in the previous month, the “appetite for borrowing in the household sector was picking up,” “the housing market generally appeared to be improving,” and “forward-looking indicators of labour demand were consistent with further moderate growth in employment.” The minutes generally give the impression of on-trend capital investment, and note that business investment and business sentiment levels have been at long-term averages or slightly below. The share market, particularly banking stocks, had fallen slightly, although the movement was not large. 

The current level of the cash rate is close to historical lows, and the bank notes that following the previous cut of 25 basis points in May, “most lenders…lowered their standard variable housing rates,” and that as a result, “lending rates for most households and businesses [were] reaching or approaching historical lows.”

Over the past month economic indicators have been broadly in line with expectations, with no major deviations or surprises that would affect the bank’s assessment of the economy. The bank still seems to be in an easing cycle, as it explicitly noted in the June minutes that “the inflation outlook as currently assessed might provide some scope for further easing, should that be required to support demand.” This is the bank signposting that it is willing to engage in further easing if required.

Nevertheless, if the bank had been considering a rate cut for the upcoming meeting, the currency depreciation that has occurred in the meantime is likely to stay their hand. The AUD:USD has fallen from 0.97 to 0.92 over the last month - towards a level the bank will consider closer to a trend value. Such a currency move is essentially passive monetary easing, making a rate cut from the RBA at the next meeting unlikely.

As such, while the RBA has signposted that it is still committed to monetary easing if it is necessary to support demand, recent on-trend data-points from the real economy and a depreciating currency tip the scales in favour of a hold.

Over the next couple of days I will be surveying other members of the UQES Executive, as well as some of the academic staff at the University of Queensland School of Economics. Feel free to give us your opinion below!

The Budget and the Big Picture 


Moments into his Federal Budget speech to the House of Representatives, Wayne Swan said that “budgets are about choices”. It was one of the few statements in his speech on which there would be universal agreement. 

In a literal sense, for a nation, a budget is set of choices about how to raise revenue (and how much to raise), and how to allocate that revenue (and how much to allocate). However, the budget reveals more than just the choices found in the accounting minutiae. It reveals the choices that the politicians who drafted the budget have made about the future path of the economy and our nation. It highlights their beliefs in this regard. A similar set of choices and beliefs is revealed in the opinions of political opponents to the budget. What does all of this tell us?

For every word of economic legislation there is a thousand words of analysis, and at least for me, it is difficult to determine the signal from the noise. Where does politics end and reality begin? When is a spending cut a spending cut, instead of a slowdown in the growth of spending, or a downgrade in a growth estimate, or a manipulation of accrual figures? 

As you can imagine, this means I’m not an authority on the details. If you’re interested in the nitty gritty, the Financial Review has some great graphics on their website that illustrate the revenue and expenditure positions, and some summaries of the big changes. If you’re brave enough, you can read the legislation yourself.

What I think is not mentioned enough is the bigger picture, the macroeconomic implications of this budget and what it says about how our budget debates are framed.

What is most striking about the budget debate in Australia is that it is not centred on if we should return to surplus, but rather how rapidly we should. The position of the Labour government is “soon.” The position of the Coalition is “sooner.”

The Labour government was so captured by this debate that it made the promise to achieve surplus by this fiscal year literally hundreds of times. While this promise has been broken, due to what the Treasurer described as “significant” revenue write-downs, he asserted in his budget speech that the government remains committed to its goal. Notably, the Treasurer did not have any partisan ‘big-spending’ provisions in his bill to try to garner cheap votes, since the NBN is financed off budget and the NDIS is bipartisan legislation fully funded by the Medicare levy increase. It seems the current government really is committed to the spending cuts it has planned (or perhaps is just resigned to losing the next election, and didn’t bother with the usual election year pork-barrel spending).

Nevertheless, as is typical in politics, the opposition does not want you to be reassured by these measures. Shadow Treasurer Joe Hockey claimed immediately after Swan’s speech that Australia is faced with a dire budget crisis. This claim is probably hyperbole, and so a more reasonable reading of the Coalition position might be that the Labour party has not properly balanced the budget over the cycle, and that since we are close to potential output (and have been for some time) we should be much closer to surplus today. On this point, reasonable people can disagree, but it is nevertheless remarkable that the budget debate is constrained to such a small set of outcomes.

We don’t have politicians arguing about how much spending is too much; we have politicians arguing over in what areas our spending should be reduced, and how fast. More importantly, we have politicians who genuinely intend to achieve these goal, and have credible plans to do so. In my mind, Swan would be very likely to return the budget to surplus if the government was re-elected, if only just to regain his credibility. If he isn’t re-elected, Abbot and Hockey have specifically stated that they are likely to keep in place the cuts that Swan has proposed, and probably enact more. Either way, government surplus is on the horizon.

I think this is a good thing. The quality of the debate has been far higher than similar debates I have followed, in the US in particular. I hold the opinion that any reasonable cuts in government spending can be offset by a forward looking, inflation targeting central bank, like the one that we have. I think that a small surplus is probably judicious, although I have seen it convincingly argued that running a deficit smaller than the rate of growth is essentially a free lunch.

Of course, this isn’t to say that details of the budget don’t matter. While the level of spending both parties propose may be similar, in the details they certainly differ. Perhaps the biggest two differences are the NBN and Climate Change policy, but those are topics for other posts. We could also talk about the proper role for deficit financing, optimal taxation methods and levels, the role of monetary policy, demographic issues… the list goes on (and hopefully so will the blog posts!).

But, like I said above, this isn’t a post about details. Sometimes I think it is worth taking a step back, and remembering that at the macro level, our budget debate is constrained to how soon we should begin repaying government debt. I think, for that reason, we should count ourselves lucky.

Ben Jackman.

What We Do Here 

It’s time for me to get cracking on the UQES economics blog! The post below is my introduction to this blog, written in February. It feels like just yesterday I wrote that! How time flies when you’re having fun swamped with assessment.

I’m shocked that we are nearly three months into semester one, although to be fair I am in a state of perpetual shock about how far we are into semester, no matter how far we are actually into semester.

There is probably no better time to get a proper start to a new economics blog than on the evening of the Federal Budget Speech, when every pundit, journalist and economically literate layman has the economy on the mind. Alex Mclaren and I have been commenting on the budget via the UQES twitter account, @UQEconomics, and since I’m in the social media mood, it seems I should keep the ball rolling.

The UQES President Nathan Johnston has asked me to write this post to outline my vision for what this blog should be, and what my expectations are for those who post and comment.

The blog is intended as a chance for UQES members, the UQES executive, students, and the wider academic community at UQ to discuss economics in a setting that reflects the goals of the UQES as an organisation. Since that may sound like a platitude, let me get specific.

On the front page of our website, we define ourselves as a student organisation that aims to “enrich the university life of all UQ economics students” through “professional development and social interaction in economics”. How can we do this with a blog?

The discussion of ideas in the economics blogosphere has helped me develop my knowledge of our dismal science to no end, sometimes giving me new ideas, reframing old ideas, challenging my beliefs, or refining those I already had. I believe what I have read has nurtured my interest in economics and contributed greatly to my motivation to study this field. I hope to replicate this feeling in others with this blog and the discussion we’re aiming to create. I am sure this meets our criteria of enriching university life for students through social interaction.

In fact, for students in particular, a discussion like that found on blogs is the best way to spark interest in an academic field. Study can feel like a chore, reading professional academic work requires a functional knowledge of the conceptual foundation of that field, and is often difficult for students with a limited technical ability.

So, if you’re studying or thinking about studying economics, or you teach it, or are just interested in it, I hope this blog will engage with you. You are welcome to comment on any post you see, or submit something that you would like to have posted for consideration.

We will write about any topic related to the field of economics. It might be short or long (although we probably won’t post our end of semester assignments). We might write about the economy, or about theory, or our personal experience, or our learning process, or anything else. Anyone can comment on any post, although comments must be relevant and polite. The metrics by which we define relevant and polite are at my discretion, although they default to common sense. The opinions presented are (and will be) solely those of the author, and will in no way reflect that of the UQES, UQ, the UQ Student Union, the UQ School of Economics, or any other related body.

I will begin in the next day or two with a post on the budget presented by the Federal Treasurer this evening. I hope it promotes discussion, or inspires someone else to post something. The UQES Executive will be posting intermittently over the rest of the year, and our Former President Dear and Eternal Leader Alex McLaren might even make an appearance.

At any rate, I hope you enjoy.


Ben Jackman.