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Wednesday, 28 February 2018

RBA losing credibility (says Credit Suisse)

Cred problem

Credit Suisse noted this week that the Reserve Bank's credibility is being eroded, as duly reported by the Scutt at Business Insider.

Well, yes, if you have a 2 to 3 per cent inflation target and you keep missing it quarter after quarter after quarter..sooner or later people are going to question your commitment to hitting it. 

The glass overflowing!

What's more, in a speech a week ago on 'Household Indebtedness and Mortgage Stress' the Reserve Bank variously noted and concluded that:

-'non-performing loans remain very low at around 0.8 per cent of domestic housing loan books'

-mortgage repayments are not at a level indicating stress

-a large proportion of indebted owner-occupier households are ahead on their mortgage repayments

-a large proportion of households have protection against financial stress

-applications for property possession as a share of the total dwelling stock have declined since 2010

-lending standards have been strengthened and the quality of lending improved 

-'the number of households experiencing financial stress has steadily fallen since the mid 2000s'

-the overall level of stress among mortgaged households remains low

-the banking system is strong and well capitalised, and is supported by prudent lending standards

-the risks to financial stability 'therefore...remain low'

¾ million unemployed

Now that's all terrific news, not to mention a rather upbeat assessment. 

But, if true, this in turn begs the question: why do we have 723,800 people sitting around unemployed, with inflation continually shooting below target, wages growth meandering along at close to the slowest on record, while the risks to financial stability, quote, 'remain low'?

And that's before taking into consideration underemployment, and the hundreds of thousands of underutilised workers and employees wanting more work. 

Experiences in other developed economies with looser monetary policy suggest that the natural rate of unemployment (NAIRU) could now be lower than 5 per cent, and possibly a lot lower. 

A conundrum, indeed. It rather looks as though a significant chunk of the ¾ million unemployed are being sacrificed on the altar of financial stability? Keen to hear your thoughts!