RBA Rate Decisions More Powerful in Smaller Doses (AFR Piece)

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The Australian Financial Review ran an opinion piece of mine (with my colleague, Jan Libich) that appeared in this morning’s edition (Tuesday 7 April), titled: “RBA Medicine Should be Dispensed in Smaller Doses” on p.43 (some of you will find the link to be gated)…or e-mail me a request if you cannot access it any other way.

It discusses an idea of ours to improve the impact of central bank interest-rate setting in Australia, which is to reduce the increment of change to the cash target rate (the main monetary policy instrument), from 25 to 10 basis points. Such a change would incur a relatively small adjustment cost, while providing a good return on extra ‘signalling power’. Read the piece to get more detail.

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New Edition of our Finance Textbook

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The new (3rd) edition of my textbook Financial Markets, Institutions and Money (with David Kidwell, Mark Brimble, Paul Docherty, Paul Mazzola and Anup Basu), published by John Wiley & Sons Australia, is now available at all good academic bookstores.

While I no longer teach finance (hence don’t get an opportunity to use it), it was a pleasure contributing to a pedagogic project that I really believe in, and working with an assortment of like-minded economics/finance academics.

 

Not Everyone Wins when Interest Rates Fall

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[Archived from: The Conversation, 1 May 2012]

In the likely event that the Reserve Bank Board chooses to ease the target cash rate by 25 (or even 50) basis points later today, it is almost guaranteed that all of the major daily newspapers around the nation will provide an overwhelmingly glowing assessment of the Board’s monetary policy decision on behalf of the Aussie battlers, who will breathe a collective sigh of relief.

Indeed, we may be treated to headlines reporting a cut analogous to “RBA Christmas Cheer”, the likes of which we saw after the last rate fall in December last year (also in the same month of 2008, 2001 and 1998); we may even see cartoons depicting Glenn Stevens as and the other Board members in a very flattering light.

The tendency of media outlets, print and otherwise, to almost unambiguously characterise interest rate decreases as good and increases as bad ensues irrespective of whether such a decision is truly the best call to maintain inflation within the target band and ensure full-employment in the medium-term.

However, not everyone will be celebrating, should it comes to pass as predicted. We need only to refer to the basics of credit markets for this to become apparent – contrary to popular belief; interest rate cuts (likewise increases) create both winners and losers.

Specifically, when banks pass on a rate cut to their customers, it benefits borrowers – even those with a smaller amount of savings. However, it is to the detriment to net savers, whose returns on those savings fall. Could it be that most columnists fall into the former category?

As for the argument that a fall in market interest rates is supposed to be good for future economic activity, the danger is that market rates may already be lower than the optimal levels for medium-to-longer term growth. If so, the current injection of economic activity produces heavier recessionary pressures later, not to mention the threats of inflation and economic volatility.

The disclaimer is that in reminding readers of this, I am someone who would like to own their own property but, for the time being, feels having been frozen out of the home ownership market by significant past price rises fuelled by more aggressive (but arguably less-creditworthy) borrowers. Hence, one falls into the net saver category.

As schadenfreudian as it may sound, I would personally love to see a rate rise this afternoon, followed by further hikes in the coming months, until defaults in credit markets clear out all the suckers who should not have outbid me in each of those auctions in the first instance. Then, property prices will return to levels consistent with the underlying fundamentals.

The lament that one feels about the asymmetric media coverage is that it seems to pander predominantly to the significant proportion of their readership that are net borrowers, and increasingly so: the 2006 census revealed that 64.8% of all private dwellings in Australia were owner-occupied, down slightly from 66.4% in 1996.

More strikingly, the proportion of these properties owned outright declined significantly over that decade, from approximately 62% to 51%, which in turn means that more homeowners have mortgages. The impending release of data from the most recent census in August last year will shed further light on this emerging trend.

The balance of power may be starting to change, however, with the ranks of self-funded retirees set to expand in the coming years, as the baby boomers begin to retire in greater numbers, combined with a higher propensity to save for retirement by successive generations of workers.

Should demographic change eventually bring about such redistribution in media consumption influence from borrowers to savers, then media providers may think twice about how they spin their coverage of interest rate changes and monetary policy generally.

In the meanwhile, net savers should to be reminded that they can exert their influence by sending letters to the editor of their favourite newspaper, demanding that the reporting of such issues be more objective to both sides of the balance sheet.

UPDATE: The Reserve Bank of Australia has cut Australia’s official cash rate by a larger-than-expected 50 basis points, to 3.75%.

My Appearance on ‘ABC News Breakfast’

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I appeared News Breakfast (ABC2 and ABC News24) back in January (6th) with Michael Rowland and Mary Gearin discussing the Queensland floods, retailers campaign against online competition, changes in the RBA Board, and Australia’s hosting of the 2015 Asian Cup. Only managed to upload it recently…enjoy!

WATCH ON YouTube

Liam Lenten on ABC News Breakfast, 6 January 2011 discussing four of the more newsworthy items of the day.

Release of my First-Ever Textbook

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I am very excited about the release of my first textbook, called: Financial Markets, Institutions & Money . It is the 2nd edition of an Australian adaptation of the existing US text by lead author David Kidwell (Minnesota); and co-authored with, Mark Brimble (Griffith), Anup Basu (QUT) and Dianne Thomson (Deakin). It is published by John Wiley & Sons Australia, and now available!

The experience was great – I always enjoy exploring academic activities for the first time, and I will probably jump at the chance for another edition (or a different text). I will be using this in my Financial Instruments subject at La Trobe, and look forward to applying some of my original contributed material from the text in the subject design.