Opinion: Dear Keating, Government Debt Doesn’t Require RBA Support
- Published on
- 24 Sep 2020, 05:03 PM
By Sophia Rodrigues
Former Prime Minister Paul Keating’s overly critical opinion piece on the Reserve Bank of Australia is unfair and unwarranted.
On its own I strongly disagree with his views and I disagree even more now after reading the speech by Treasurer Josh Frydenberg Thursday.
One line from the speech sums it all -- low interest rates make our debt servicing task easier.
If the RBA is way behind the curve in supporting the government in its budgetary funding measures, the first person to say so would have been Frydenberg or Prime Minister Scott Morrison.
I have not heard Morrison say anything and I certainly did not see any hint of it in Frydenberg’s speech today.
So, on what basis is Keating saying the RBA is not supporting the government?
Keating would like the RBA to “ambitiously” buy bonds in the secondary market. Has he checked with the government if they want the RBA to do so?
If he did, he will be surprised to hear the answer is likely to be a No.
Frydenberg said today Australia’s debt will be at a much higher level which means a big borrowing task ahead.
Big borrowing requires support from big investors. If it means paying a few basis points more to keep the demand going, the government is prepared to do so because rates are currently at record lows.
A large-scale QE would help by pushing down yields, but it would also introduce uncertainties in the market, and risk turning investors away.
Or maybe it will not. But I doubt if the debt managers at the federal or state levels are keen to find out via a failed tender or insufficient demand at reasonable rates.
Keating’s suggestion that RBA should finance the fiscal deficit was also absurd.
RBA governor Philip Lowe said in a recent speech any monetary financing proposal is only relevant to the situation where high government debt constrains the ability of the government to provide necessary fiscal stimulus financed through the normal channels.
Australia is clearly not in this situation and record demand for our bonds confirm this.
All this does not mean the RBA will not consider QE but the motivation to do that would be much more than supporting the government’s debt funding, simply because the government has neither asked nor needs support from the RBA.