RBA’s Kent Says Monetary Coverage Course Dangerous

Just upstairs.You were talking about this change in the monetary policy implementationsystem is being about the piping, not about the temperature of the waterthat's rushing through the pipes. Can you elaborate a little bit more onthat? Yes.So what we've announced today is a new system for implementing monetary policy.What we'll be transitioning to in the future.But I wanted to emphasize that really is about the plumbing, the nuts and boltsof moving money around, about us achieving our cash rate close to thecash rate target.

But it's not what that target is.What that target is, is it's monetary policy.This isn't about monetary policy. It's just how we achieve the target atany given time. But it's also about responding toperhaps some of the imbalances within the system structurally coming from thelast few years. Well, it's about responding to therunning down of the very large level of reserves.We call that excess reserves that are in the system because we and other centralbanks pursued unconventional monetary policy.So they put a lot of money in the bank.

Accounts.Those are gradually unwinding as that bonds mature as the TFF gets repaid.So it's about looking to the future and thinking about how what we need to do tosort of what system we need to transition to when it comes to themoderation of that balance sheet. Obviously, a lot of it will demanddepend on underlying demand. But do you have sort of an idea of scaleof timing of how that framework will play out?No, we don't. And indeed, that's partly why we pickedthe system with pigs. So what we've chosen is what we call afull allotment allocation system at.

Omos.That means the banks come to us and for a fixed price they can borrow reserves,pledge collateral for 28 days at the moment, and they can take what they wantas long as they have sufficient collateral.So what that's about what that means is the supply of reserves is going todepend on the banks demand. The banks have their own estimates.We could come up with some rough ones, but until we get there, we won't know.But the it should transition fairly seamlessly from one of excess to ample,and we'll know we're there when banks start showing up in larger numbers andlarger quantities at our operations on a.

Weekly basis.I think until we get there, we won't know.Probably, you know, is a good phrase to describe a lot of aspects of what we'reout at the moment in terms of monetary policy upstairs, you asked, you know, alittle bit cheekily to give one word to describe monetary policy settings andtrajectory. I'm going to give you a few more wordsif you want. Can you elaborate?Yeah, I think the starting point is just to say that the board's made it clearthinks the interest rate path that will best bring inflation down in atimely manner is uncertain.

And so they've not wanted to ruleanything in or out with regards to interest rate changeswhere we're in a better place than we had been.Inflation has come down a long way. It does look to be moderating, but thepath in, according to our forecasts, is a gradual moderation from here.Labour market pressures, they're easing, they're still tight, but they're easingand that's because growth is slowing. And so that brings demand into a bit ofbalance with supply. So all those things are in place.Our central forecasts are sort of predicated on sort of further goodthings happening, including productivity.

Growth.But there's a lot of uncertainties around that.And I think the key point is those are reasonably well balanced as best we cantell. And because of that, the path to sunsetand the next rate change, I don't know if it's higher, don't know if it's goingto be a lower interest rate. When you talk about the not being theinability to rule out shocks. Right.How much of those risks do you worry about that might be external, that mightbe geopolitical, You know, that might be, you know, election driven thepolicies of other countries and how much.

Of it are sort of domestic, maybestructural macroeconomic aspects that perhaps we haven't seen in the data setsyet? I think it could be both.We just don't know. But I mean, as a small open economy,we're always subject to developments offshore.We've talked at length about what's happening in China.China's a major export market for us and there are concerns there about theirproperty sector and the problems that they're trying to deal with there.So that can have an impact on things like demand for commodities like ironore and that can move our economy.

Around.But equally domestically, things can be moved by what people here in the US, inthe Australian economy are doing, particularly households at the moment.How are they going to behave in the future?That will sort of be a key, a key point for where the economy goes andhouseholds. Actually I wanted to get your views on,in particular the savings data, which I know you look at quite closely.There's made a lot of concerns about global debt, right?Government debt and household and private debt.And in Australia we know that the latter.

Dwarfs government debt levels.What are you seeing in the data at the moment when it comes to household savingand spending? And are you.Concerned, Tom. No, I'm not.I think what you can see in a number of different places is household savings.Maybe holding up a bit more than people would have thought.And I say that because we know household consumption is very weak.And households also built up a fairly not all households, but many householdsbuilt up a big buffer during the pandemic.And they're running that down, but.

Running it down quite slowly.And households with mortgages are still paying extra.Overall, not all mortgage holders, but overall households with mortgages arepaying extra into their accounts, into they all sit and redraw accounts, andthat's holding up around the sort of average levels even picked up in thelast six months. I think that's a sign that monetarypolicy is working, because one of the things that monetary policy does is wheninterest rates are high provides an incentive to save.So maybe that's telling you monetary policy is working.The same sort of rhetoric you're hearing.

From a lot of central bankers trying tonavigate this last tricky leg of this policy cycle.How difficult is it to be a central banker in this environment at this pointin time after everything that's happened in the last few years?Look, I think they always have. They always sort of want to look withfresh eyes at all of the data that comes in.The central bankers also need to take a slightly longer term perspective and bethinking about the trajectory and weighing up all sort of bits ofinformation that markets get very excited about.But adding it only adds incrementally to.

What we really know.And I think all central bankers at the moment are just looking, are we reallyon this path where inflation will come down?Labour markets, which have been very tight, will ease, but not too much.So that unemployment rate rises too much and we can hold onto all thoseemployment gains we saw during the pandemic, particularly here.So I mean, it's always a challenge, but that's the job.That's what they're doing. And financial markets have stillremained very sanguine about the potential risks in this next part of thejourney looks like.

Right.Are you comfortable with that optimism, do you think, for Australia at least, wewill stick another soft landing and keep being the lucky country because ofbetter monetary policy? Well, that's what the board is very muchfocused on, trying to bring inflation down, but in a gradual way so as tomaintain as many of those gains in the labour market as possible.One never knows. I mean, private markets, equity markets,private bond markets, they're fairly richly priced at the moment and we'vemade references to that in the Financial Stability Review.So the central bankers should be.

Watching for those markets and there'salways could be a period of adjustment, as I said upstairs, you know, inresponse to a question. Financial conditions here in Australia,those sorts of things are important, what's happening in private markets.But a lot of what matters is just what's happening to cash rate, what's happeningto best rates, what's happening to the short end of the yield curve.That's the nature of how markets.

Sharing is caring!