RBA money creation to drive Australian rates up earlier, CBA says

By James Glynn

SYDNEY – The deluge of fiscal stimulus measures rolled out by Canberra to mitigate the impact of the Covid-19 pandemic in Australia, could come with a sting in its tail as the central bank’s money creation that financed the spending of the government drives up inflation.

Gareth Aird, head of the Australian economy at the Commonwealth Bank of Australian, expects inflation to rise in the years to come, triggering interest rates to rise from early 2023 and pushing prices higher. mortgage rates at a time of rapid growth in household debt.

“The fiscal stimulus from the Covid shock was indirectly funded by the purchase of Reserve Bank of Australia bonds, which is money creation,” Mr. Aird said.

“We predict that the powerful combination of quantitative easing and direct cash payments from government to households will boost future spending and lead to higher consumer inflation over the next few years,” he said.

The CBA predicts that core inflation will be around the midpoint of the RBA’s 2.0% to 3.0% target range by mid-2023. In contrast, the RBA expects core inflation to be 2.0% by mid-2023.

The CBA warning comes as RBA Governor Philip Lowe recently berated financial markets for pricing interest rate hikes as early as late 2022.

Household deposits grew faster than credit in Australia due to government transfer payments, while the RBA’s bond buying program, which essentially funded budget support payments, boosted the mass monetary, Mr. Aird said.

Washing cash from savings accounts will ultimately bring core inflation back into the RBA’s target range earlier than the central bank expected, forcing interest rates to rise, he said.

An unusual situation arose in 2020 as bank deposits swelled against credit growth. Some people also had the opportunity to dip into their retirement savings to weather the crisis, thus increasing the liquidity of the system. But it was the wave of fiscal stimulus unleashed by Canberra and state governments that drove bank deposits up.

“Households don’t have to repay this money the same way they repay a loan. So the increase in deposits is powerful in the context of thinking about future spending,” Mr. Aird said.

The ABC estimates that during the pandemic until mid-2021, household deposits grew by about A $ 70 billion more than they otherwise would have. This is equivalent to 3.5% of GDP.

This figure is expected to reach $ 120 billion by the end of 2021, or 6% of GDP.

Households that have also strengthened their balance sheets by speeding up debt repayment, so they will feel more confident about spending in the future, Aird said.

If households spend around 15% of accumulated savings in 2022, the economy will see a direct increase in consumer spending of A $ 35 billion, the equivalent of 1.75% of GDP.

The extraordinary injection of liquidity into the household sector by the government, which contributed to the large accumulation of savings, was financed by the issuance of public debt, and by far the largest buyer of public debt during the pandemic was the RBA.

“The RBA’s massive bond-buying program, which largely funded the fiscal expansion, has in many ways blurred the line between fiscal and monetary policy,” Mr. Aird said.

“If you step back and look at what happened during the pandemic, it conceptually reveals that we have entered uncharted territory in Australia. Government transfer payments were indirectly funded by the central bank through of money creation, ”he said.

Write to James Glynn at [email protected]

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