Keating’s RBA Criticisms Miss The Mark

By Glenn Dyer | More Articles by Glenn Dyer

It’s clear Paul Keating has failed to understand what the Reserve Bank has done to support the economy – not the federal government and its budget, as he wrongfully claimed it should be doing – but the economy as a whole – business, consumers, farmers, elderly, young – everyone.

Keating’s criticisms came after RBA Deputy Governor, Guy Debelle provided an update on the impact of monetary policy on the economy at the moment in which he revealed the bank is looking at further rate cuts and other measures.

His suggestions about how the RBA could impact the value of the Aussie dollar had an immediate impact – the dollar has fallen from 73.35 US cents just before Dr. Debelle started his speech on Tuesday morning, to 70.42 late Thursday in Sydney. That’s a fall of 4% in three days and came as the US dollar rose against the euro and the yen on safe-haven buying by nervy investors.

Former RBA board member, Warwick McKibbin also supported the RBA saying that Me Keating’s urgings, if implemented, could ‘politicise’ the central bank’s policymaking.

The RBA was supported on Thursday by former Governor, Bernie Fraser – who was also head of Treasury when Keating was Treasurer and Prime Minister from 1989 to 1996. Fraser told Fairfax media that he though the RBA had provided plenty of liquidity to the economy and financial system, kept interest rates low and been encouraging the federal government to spend more.

The best example of the size of the bank’s support – that’s in addition to cutting the cash rate to 0.25% and targeting the yield curve for Commonwealth Government bonds to 0.25% for three years – is seen in the way the RBA’s balance sheet has almost doubled in size since February. In his speech on Tuesday, Deputy Governor, Guy Debelle made the point that:

“The various monetary policy actions have led to a significant increase in the size of the RBA’s balance sheet from $170 billion in February to $300 billion currently. ….The consequent large amount of liquidity in the system is underpinning low money market rates for the financial system; the cash rate and bank bill swap rates (BBSW) are at historic lows. Given these rates underpin the whole spectrum of bank funding costs, funding costs have declined to historically low levels. These low funding costs have been passed through to record low borrowing costs for households and businesses.”

That plus the rate cuts and yield control (rate targeting) is the sum total of what the RBA has managed to do since February. Keating ignored these benefits and their impact completely.

The key support outside the rate cuts has been the TLF – the Term Lending Facility. Originally set at $84 billion in the historic announcement on March 19. That was boosted to $200 billion (with a cutoff now set at June 30, 2021 from the original September 30) because the bank saw rising demand and the need to maintain as much capacity as possible to support banks and companies (and indirectly workers and consumers) once the government support schemes such as JobKeeper and JobSeeker was wound back or dropped.

Dr Debelle said that so far $75 billion had been lent to banks under the TLF.

“The initial allowance … has been gradually taken up over the past six months, and particularly in recent weeks, such that take-up currently stands at $75 billion. Different types of institutions, whether large, medium-sized or small, have accessed similar shares of funding from the TFF.

“The Reserve Bank Board announced an extension of the TFF following its September meeting. This amounts to an additional 2 percent of credit and is available to be drawn until June 2021.

“Why did the Board take this decision? Given the protracted nature of the recovery, the Board considered it appropriate to provide more funding and for a longer period to support the Australian economy in the recovery. The larger amount of funding available, at least 5 percent of total credit, is a further easing in the stance of monetary policy. It will result in a further material expansion of the RBA’s balance sheet for the next three years.

Dr. Debelle said the TLF had “lowered lending rates by lowering bank funding costs. The TFF funding is considerably cheaper than wholesale funding of similar maturity”.… “is having a noticeable effect on the composition of bank funding”…There has been a reduction in offshore wholesale funding, which is of a very similar size to the take-up of TFF funding. The amount of domestic wholesale funding is little changed. Banks have chosen to let their offshore funding roll-off as it matures.”

That in turn has made the Australian financial system (especially banks) after and helped increase protection of the economy against a financial crisis developing in the US, Europe, or elsewhere is the pandemic worsens and again shuts down major economies or prolongs the global recession.

All this was ignored by Keating or skated over in his comments on Wednesday.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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