Digital Finance Analytics (DFA) Blog – Page 489

Fintech’s May Be The SME’s Champion

As the Royal Commission’s third round of public hearings casts the spotlight on Big Four banks and SME lending, Fintech Moula says another spotlight is cast on fintechs who have stepped up to address the gap in market left by banks and traditional lenders.

Moula CEO Aris Allegos said: “SMEs make up over 97% of Australian businesses, but have been neglected for so long. The big banks haven’t been able to cater to this market, which is why we’ve tailored our product to the specific needs of business owners. Our process focuses on eliminating the hurdles and lengthy application processes, delivering decisioning within 24 hours.”

“Moula has listened to the unique needs of a business providing funding relevant to their specific needs and circumstances.”

Banks’ underwriting still hasn’t adapted to the new lending landscape: applications involve cumbersome submissions, and documentation requirements are often prohibitive. The bulk of applications are reviewed manually, which take 6-8 weeks on average to process.

Notwithstanding, the cumbersome application process doesn’t mean banks are better able to approve a business loan. According to Digital Finance Analytics’ 2017 SME Survey, unsecured business loan applicants now face a 74% rejection rate, up from last year, where businesses had a 67% likelihood of being rejected by traditional lenders.

Responsible lending plays a huge part in Moula’s business model, which focuses on sustainable underwriting.

“At Moula, we’re backing good businesses to help them achieve their ambitions, and the only way to achieve this is through honest, transparent, and responsible lending.

“Transparency is at the core of our business model and a key value at Moula. We’re proud to be leading the market in defining best-practice transparency and disclosure.”

Financial system under ‘great threat’: ASIC

From Investor Daily.

The failures within the banking sector uncovered by the royal commission constitute a “great threat” to the financial system, says ASIC chairman James Shipton.

Speaking at the Australian Council of Superannuation Investors conference in Sydney yesterday, Mr Shipton was asked how seriously he was taking the threat to the financial system given the failures aired at the royal commission.

“I think the threat is great. As a former member of the finance profession – as a person who is proud to be a financier – I find it jarring and disappointing that this is [sic] circumstances in which we find ourselves,” he said.

“As a proud Australian who is returning from nearly 25 years overseas, it is very confronting that we find ourselves in this situation,” Mr Shipton said.

The misconduct discussed at the royal commission “must not stand, [it] must be addressed”, he said.

Mr Shipton also highlighted the “proliferation” of conflicts of interest in parts of the financial industry.

“It is clear to me that a number of institutions have not taken the management of conflicts of interest to heart,” he said.

“This is verging on a systemic issue. Indeed, it is the source of much of the misconduct ASIC has been responding to and which is being highlighted by the royal commission hearings.”

Mr Shipton expressed his “surprise” that many Australian firms have “turned a blind eye” to conflicts of interest as their businesses have grown.

“Too often, unacceptable conflicts were justified by firms on the basis that ‘everyone else is doing it’, even though it’s the right thing to do to end them.

“A business culture that is blind to conflicts of interest is a business culture that does not have the best interests of its customer in mind. Moreover, it is one that is not observing the spirit as well as the letter of the law,” he said.

‘Conflicted’ remuneration should go: ASIC Chair

From The Adviser.

The new chairman of the ASIC has said that he has been “surprised” that there has been “reluctance, and often resistance, to addressing conflicts, especially those embedded in remuneration” – highlighting the broker remuneration report.

Speaking at the Australian Council of Superannuation Investors Annual Conference on Thursday (17 May), the chairman of the Australian Securities and Investments Commission (ASIC) told delegates that he had been “surprised” by several themes and issues in the financial services sector since taking up the helm of the regulator three months ago.

In his speech, ASIC chair James Shipton said: “My concern is that many people in finance have lost sight of the ultimate purpose of the financial system; they have forgotten that this system is about managing other people’s money…

“I worry that many financial services companies have become insular by focusing only on how they can maximise earnings.

“Accordingly, the first job of the sector is to refocus on these core purposes, instead of exploiting opportunities to make money from its customers often to the consumer’s considerable detriment. This is exemplified by the proliferation of conflicts of interest in parts of the financial sector.”

Noting that conflicts are a “perennial challenge for business”, he added that it was “clear” to him that a number of institutions “have not taken the management of conflicts of interest to heart”.

Mr Shipton said: “This is verging on a systemic issue. Indeed, it is the source of much of the misconduct ASIC has been responding to and which is being highlighted by the Royal Commission hearings.

“The inappropriate sale of financial products in caryards by a commission-driven salesforce is but one example that ASIC has tackled in recent times. And yet conflicts of interests are not new.

So, what has surprised me is that:

many Australian financial firms have turned a blind eye to the risks that conflicts pose to customer outcomes as their businesses evolved or grew;

they didn’t have a management system, a management culture, or codes that were attuned to identifying and resolving conflicts; and

there has been reluctance, and often resistance, to addressing conflicts, especially those embedded in remuneration – even when ASIC pointed them out.”

According to Mr Shipton, this “resistance has, at times, extended to a reluctance to make good any harms caused by conflicts”.

He continued: “Too often, unacceptable conflicts were justified by firms on the basis that ‘everyone else is doing it’, even though it’s the right thing to do to end them.

“A business culture that is blind to conflicts of interest is a business culture that does not have the best interests of its customer in mind. Moreover, it is one that is not observing the spirit as well as the letter of the law.

“And so, it is time for Australia’s financial services sector to remember its purpose – and remember always that they are dealing with other people’s money; it must focus on the outcomes it delivers to its customers.”

Mr Shipton therefore called for a “wholesale review by firms to identify, manage and, if appropriate, remove every conflict.

“Only when this is done can the journey of rebuilding trust with our communities begin,” he said.

Looking back at removing ‘conflicted’ broker commissions

While he said that ASIC favours this option in relation to conflicted payments in advice, he highlighted how the ASIC review of broker remuneration highlighted the “desirability of removing at least some of the remuneration-related conflicts in this sector”.

The new ASIC chair said: “In recent years, the Australian Parliament has banned commissions and other conflicted payments in financial advice. This was a recognition that the best way to deal with some conflicts was not to manage or disclose them, but to remove them altogether.

“This is an option that ASIC favours in relation to conflicted payments in advice. There can be no ambiguity in this area. So, I would strongly suggest that all financial firms keep this in mind when considering how to deal with conflicts of interest arising from remuneration structures.

“We have, for example, in our report on mortgage broker remuneration, highlighted the desirability of removing at least some of the remuneration-related conflicts in this sector.”

While the ASIC report suggested that volume-based and bonus commissions could create conflicts, and should be removed (a suggestion that the industry has largely accepted and is working on implementing, via the Combined Industry Forum), the report did also conclude that the standard model of upfront and trail commissions “creates conflicts of interest”.

ASIC’s report 516: “This standard model of upfront and trail commissions creates conflicts of interest. There are two primary ways in which these conflicts may become evident.

“Firstly, a broker could recommend a loan that is larger than the consumer needs or can afford to maximise their commission payment. This may also involve recommending a particular product or strategy to maximise the amount that the consumer can borrow (e.g. through the choice of an interest-only loan)…

“Alternatively, a broker could be incentivised to recommend a loan from a particular lender because the broker will receive a higher commission, even though that loan may not be the best loan for the consumer. We refer to this as a ‘lender choice conflict’,” the report read.

The ASIC remuneration review did not, however, suggest radically changing the commission structure.

It put forward six proposals to improve consumer outcomes and competition in the home loan market, including:
(a) changing the standard commission model to reduce the risk of poor consumer outcomes;
(b) moving away from bonus commissions and bonus payments, which increase the risk of poor consumer outcomes;
(c) moving away from soft dollar benefits, which increase the risk of poor consumer outcomes and can undermine competition;
(d) clearer disclosure of ownership structures within the home loan market to improve competition;
(e) establishing a new public reporting regime of consumer outcomes and competition in the home loan market; and
(f) improving the oversight of brokers by lenders and aggregators.

While no response from government has yet been made regarding what changes, if any, should be made to broker remuneration, it is largely expected that no such response will be made public until the royal commission and Productivity Commission conclude their work on the financial services sector.

The Government Consults On The Retirement Income Framework

According to the Treasury, the retirement phase of the superannuation system is currently under-developed and needs to be better aligned with the overall objective of the superannuation system of providing income in retirement to substitute or supplement the Age Pension. The Government is addressing this through the development of a retirement income framework.

The first stage in this framework is the introduction of a retirement income covenant in the Superannuation Industry (Supervision) Act 1993, which will require trustees to develop a retirement income strategy for their members. The covenant will codify the requirements and obligations for superannuation trustees to consider the retirement income needs of their members, expanding individuals’ choice of retirement income products and improving standards of living in retirement.

They have published a position paper which outlines the principles the Government proposes to implement in the covenant and supporting regulatory structures. Consultations close 15 June 2018.

The retirement income framework

The retirement phase of the superannuation system is currently under-developed and needs to be better aligned with the overall objective of the superannuation system of providing income in retirement to substitute or supplement the Age Pension. The Government is addressing this through the development of a retirement income framework. The framework is intended to:

enable individuals to increase their standard of living in retirement through increased availability and take-up of products that more efficiently manage longevity risk, and in doing so increase the efficiency of the superannuation system and better align the system with its objective; and

enable trustees to provide individuals with an easier transition into retirement by offering retirement income products that balance competing objectives of high income, flexibility and risk management.

In December 2016, a discussion paper on Comprehensive Income Products for Retirement (CIPRs) was released for consultation[1]. Submissions closed on 7 July 2017. The Department of the Treasury (Treasury) received 57 written submissions on the discussion paper, and met with more than 100 organisations.

That consultation revealed that there is broad agreement on the importance of what the CIPRs policy is seeking to achieve, but divergent views on the best way to achieve the objectives.

In addition, some stakeholders stressed the importance of finalising the social security treatment of pooled lifetime income products first. The Government announced the treatment of the social security means test rules for new and existing pooled lifetime income products in the 2018‑19 Budget.

Having taken steps to remove barriers to the introduction of pooled lifetime income products, the Government plans to prioritise progress on the development of a retirement income covenant.

The Government has also announced it will progress the development of simplified, standardised metrics in product disclosure to help consumers make decisions about the most appropriate retirement income product for them. Other elements of the framework will be developed progressively:

reframing superannuation balances in terms of the retirement income stream they can provide, by facilitating trustees to provide retirement income projections during the accumulation phase; and

a regulatory framework to support the other elements of the retirement income framework including definitions, any necessary safe harbours, requirements for managing legacy products and other details.

Retirement income covenant

On 19 February 2018 the Minister for Revenue and Financial Services, the Hon Kelly O’Dwyer MP, announced the establishment of a consumer and industry advisory group to assist in the development of a framework for CIPRs.

The central task of the advisory group was to provide advice to Treasury on possible options and scope of a retirement income covenant in the Superannuation Industry (Supervision) Act 1993 (SIS Act). The group strongly supported the idea of a retirement income covenant and provided advice on the proposed framework. This feedback has helped shape the proposed approach set out in this paper.

As part of the Government’s More Choices for a Longer Life Package in the 2018-19 Budget, the Government has committed to introducing a retirement income covenant as a critical first stage to the Government’s proposed retirement income framework. This will codify the requirements and obligations for superannuation trustees to improve retirement outcomes for individuals.

Existing covenants in the SIS Act include obligations to formulate, review regularly and give effect to investment, risk management and insurance strategies; but not a retirement income strategy.

Introducing a retirement income covenant will require trustees to consider the retirement income needs and preferences of their members. It will ensure that Australian retirees have greater choice in how they take their superannuation benefits in retirement. This should allow retirees to more effectively choose a retirement product that aligns with their preferences, improving outcomes in retirement. The proposed obligations for inclusion in the covenant are outlined in the section ‘Covenant principles’.

The covenant will be supported by regulations to provide additional guidance and outline in more detail how trustees will be required to fulfil their obligations. Appropriate enforcement will also be part of the framework. The ‘Supporting principles’ section outlines the principles and guidelines that would be included in regulations (and possibly prudential standards). Implementation of these regulations may require adjustments to existing regulations and instruments.

Finally, additional principles have been identified that may be appropriate for inclusion in the retirement income framework, but which are not being fully developed at this time. These principles will form part of the regulatory framework to be progressed at a later date.

The covenant and supporting principles would apply to trustees of all types of funds except Australian eligible rollover funds (ERFs) and defined benefit (DB) schemes that offer a DB lifetime pension. The Government considers that it would not be appropriate to require trustees of these fund types to develop a retirement income strategy because ERFs do not have any members in retirement and a DB lifetime pension already reflects an implicit retirement income strategy.

While all members of the advisory group provided valuable input and insights which have helped inform this position paper, the positions expressed in this paper are those of the Government.

The retirement income framework, including the covenant, will be implemented with an appropriate transition period to allow sufficient time for industry to adjust. The Government proposes to legislate the covenant by 1 July 2019 but to delay commencement until 1 July 2020. This timing would allow the market for pooled lifetime income products to develop in response to the changes to the Age Pension means test arrangements announced as part of the 2018-19 Budget and for other elements of the framework to be settled.

[1] Treasury, Development of the framework for Comprehensive Income Products for Retirement, Canberra, 2016.

Macquarie Merges Private Wealth Businesses

From Financial Standard.

Macquarie Group is consolidating its private bank and private wealth businesses to concentrate its growth strategy on high net-worth (HNW) clients, a move it expects to affect advisers.

This underscore the transition in wealth management, as players morph their businesses in the light of the “best interest” requirement, and the fact the providing such advice is costly, and cannot be done en masse. So the focus will be on HNW investors.

HNW clients are already the exclusive focus of Macquarie’s private bank. They are also a substantial proportion of its private wealth business.

The announcement was made by Macquarie’s Banking and Financial Services group (BFS), which also looks after retail banking activities. The gearing towards HNW investors in the bank’s private wealth and banking business will have no impact on BFS’s retail banking strategy which includes home lending, deposits and credit card solutions for consumer clients.

Macquarie head of wealth management Bill Marynissen said concentrating on one client segment will enable it to deliver better on a comprehensive and tailored wealth and banking offering that can take clients from wealth accumulation stages through to retirement.

“Focusing on attracting high net-worth clients is a logical evolution of our private client business and we believe it is a space in which we can be a market leader,” Marynissen said.

“We have carefully assessed growth opportunities in the high net-worth segment against the strong fundamentals of our business. These include a deep understanding of the high net-worth segment, our wealth and banking expertise and suite of solutions, and the capacity to build on our existing digital capabilities.”

Australia has more than 1.2 million adults with wealth of $1.3 million or more, ranking it among the top 10 countries globally for HNW individuals. The segment swelled 7.4% or by 80,000 adults since 2011.

Many advisers will be impacted by the decision to concentrate the focus of the combined private bank and private wealth businesses to HNW clients, according to Macquarie’s wealth management division.

“Macquarie is supporting these advisers in a number of ways, including by facilitating discussions with other firms and assisting with their transition,” the bank said.

Unemployment Higher In April 2018

The latest data from the ABS covers April 2018 employment. The trend unemployment rate rose from 5.53 per cent to 5.54 per cent in April 2018 after the March figure was revised down, while the seasonally adjusted unemployment rate increased 0.1 percentage points to 5.6 per cent. In fact employment growth is stalling.

The trend participation rate increased to a further record high of 65.7 per cent in April 2018 and in line with the increasing participation rate, employment increased by around 14,000 with part-time employment increasing by 8,000 persons and full-time employment by 6,000 persons in April 2018. This continued the recent slowing of employment growth, particularly full-time employment growth. and the seasonally adjusted labour force participation rate increased slightly to 65.6 per cent.

Over the past year, trend employment increased by 355,000 persons or 2.9 per cent, which was above the average year-on-year growth over the past 20 years (2.0 per cent).

The trend hours worked increased by 4.7 million hours or 0.3 per cent in April 2018 and by 3.3 per cent over the past year.

Over the past year, the states and territories with the strongest annual growth in trend employment were New South Wales (3.8 per cent), Queensland (3.5 per cent) and the Australian Capital Territory (2.7 per cent). But unemployment is highest in WA at 6.4 per cent, QLD 6.3 per cent, TAS 6.0 per cent and SA at 5.9 per cent.

The critical perspective is looking at underutilisation – or those in work who want more work. This is essentially unused space capacity. The latest data for April shows the highest rate of underutilisation resides in WA (where unemployment is also highest). TAS and SA are also quite high, while VIC and ACT have the lowest rates.

And the trends really have hardly improved at all, taking account of seasonal variations.

It is this underutilisation which explains the relatively how unemployed number, and the low wage growth we discussed yesterday.

Finally, it is worth noting that as the ABS shift their samples, as they do each quarter, there is some variability in the baseline data, which introduces statistical noise into the system.

But the bottom line is there is nothing here to suggest we are going to see unemployment falling below 5%, which many believe is the rate at which wages growth may start to trend higher.

We are trapped in a low growth, low wage, high underutilised situation, and there is no easy way out given the current economic settings.

Non-banks winning prime mortgages as majors tighten

From The Adviser.

A credit crackdown among the big four banks has been a blessing for the non-ADI sector, with lenders seeing a significant boost in prime mortgage flows. We discussed this a few weeks back.

Credit has been tightening since 2014 and a raft of measures have been introduced to stem the flow of investor loans, interest-only mortgages and foreign buyers.

“A lot of that is narrowing what is prime credit for a bank,” Fitch Ratings’ head of APAC, Ben McCarthy, told the group’s 2018 Credit Insights Conference in Sydney on Wednesday.

“As the bank prime market gets smaller, things that were prime last year will end up in the non-bank space.

“Talking to some of the issuers just recently, some of them have commented on the potential outcomes for them as an individual lender. Non-banks are telling me that their volumes are increasing, but not in the areas that you might think. Interest-only volumes are falling and investor loans are relatively stable.”

Australia’s RMBS market is dominated by the non-banks, which rely on securitisation and warehouse funding to grow their books and continue lending.

In 2017, securitisation issuance was at its highest since the GFC. Last year saw $36.9 billion of RMBS issuance, of which $14.7 billion came from the non-banks. Only $8 billion of issuance was made up of non-conforming loans.

The strength of the non-bank sector has attracted US investors. Last year, KKR snapped up the Pepper Group, Blackrock purchased an 80 per cent stake in La Trobe Financial and private investment firm Cerberus Capital Management, L.P. acquired the APAC arm of Bluestone Mortgages.

With a bolstered balance sheet, Bluestone was recently able to edge closer to the prime mortgage space by introducing a new product and lopping 225 basis points off its rates.

Last month, the non-bank lender entered the near-prime space and made significant rate cuts to the Crystal Blue portfolio, which comprises full and alt doc products geared to support established self-employed borrowers (with greater than 24 months trading history) and PAYG borrowers with a clear credit history.

Speaking of the move, Royden D’Vaz, head of sales and marketing at Bluestone Mortgages, said: “The recent acquisition of the Bluestone’s Asia Pacific operations by Cerberus Capital Management has enabled a number of immediate opportunities to be realised — most notably the assessment of our full range of products and to ensure they fully address market demands.

“We’re now in an ideal position to aggressively sharpen our rates based on the new line of funding and pass on the considerable net benefit to brokers and end users alike.”

With many anticipating a significant slowdown in bank credit growth, driven by the evidence given during the Hayne royal commission, non-banks look well positioned to capture a greater slice of the prime and near-prime markets.

“Non-banks are becoming a bigger part of the market,” Fitch Ratings’ Mr McCarthy said. “That trend will increase.”

US Production Numbers Strong In April

US Industrial production rose 0.7 percent in April for its third consecutive monthly increase according to data from the Federal Reserve.

The rates of change for industrial production for previous months were revised downward, on net; for the first quarter, output is now reported to have advanced 2.3 percent at an annual rate. After being unchanged in March, manufacturing output rose 0.5 percent in April. The indexes for mining and utilities moved up 1.1 percent and 1.9 percent, respectively. At 107.3 percent of its 2012 average, total industrial production in April was 3.5 percent higher than it was a year earlier. Capacity utilization for the industrial sector climbed 0.4 percentage point in April to 78.0 percent, a rate that is 1.8 percentage points below its long-run (1972–2017) average.

Market Groups

The rise in industrial production in April was supported by increases for every major market group. Consumer goods, business equipment, and defense and space equipment posted gains of nearly 1 percent or more, while construction supplies, business supplies, and materials recorded smaller increases.

Within consumer goods, the output of nondurables rose nearly 1 1/2 percent in April, as both consumer energy products and non-energy nondurable consumer goods posted increases. The output of durable consumer goods declined about 1/2 percent, mostly because of a sizable drop in automotive products. The advance in business equipment resulted from gains for information processing equipment and for industrial and other equipment, while the rise in materials was led by an increase for energy materials.

Industry Groups

Manufacturing output moved up 0.5 percent in April; for the first quarter, the index registered a downwardly revised increase of 1.4 percent at an annual rate. In April, the indexes for durables and nondurables each gained about 1/2 percent, while the production of other manufacturing industries (publishing and logging) rose nearly 1 percent. Among durables, advances of more than 1 percent were posted by machinery; computer and electronic products; electrical equipment, appliances, and components; and aerospace and miscellaneous transportation equipment. The largest losses, slightly more than 1 percent, were recorded by motor vehicles and parts and by wood products. The increase in nondurables reflected widespread gains among its industries.

The output of mining rose 1.1 percent in April and was 10.6 percent above its year-earlier level. The increase in the mining index for April reflected further gains in the oil and gas sector but was tempered by a drop in coal mining.

In April, the index for utilities advanced 1.9 percent. The output of electric utilities was little changed, but the output of gas utilities jumped more than 10 percent as a result of strong demand for heating due to below-normal temperatures.

Capacity utilization for manufacturing rose to 75.8 percent in April, a rate that is 2.5 percentage points below its long-run average. Increases were observed in all three main categories of manufacturing. The operating rates for durables and nondurables each moved up about 1/4 percentage point, and the rate for other manufacturing rose about 3/4 percentage point. Utilization for mining rose about 1/2 percentage point and remained above its long-run average; the rate for utilities jumped more than 1 percentage point.

Is The RBA Myopic On Financial Stability?

From The Conversation.

The Reserve Bank of Australia (RBA) is making an explicit trade-off between inflation and financial stability concerns. And this could be weighing on Australians’ wages.

In the past, the RBA focused more on keeping inflation in check, the usual role of the central bank. But now the bank is playing more into concerns about financial stability risks in explaining why it is persistently undershooting the middle of its inflation target.

In the wake of the global financial crisis, the federal Treasurer and Reserve Bank governor signed an updated agreement on what the bank should focus on in setting interest rates. This included a new section on financial stability.

That statement made clear that financial stability was to be pursued without compromising the RBA’s traditional focus on inflation.

The latest agreement, adopted when Philip Lowe became governor of the bank in 2016, means the bank can pursue the financial stability objective even at the expense of the inflation target, at least in the short-term.

While the RBA board has explained its recent steady interest rate decisions partly on the basis of risks to financial stability, this sits uneasily with what the RBA otherwise has to say about underlying fundamentals of our economy.

It correctly blames trends in house prices and household debt on a lack of supply of housing, and not on excessive borrowing. These supply restrictions amplify the response of house prices to changes in demand for housing. RBA research estimates that zoning alone adds 73% to the marginal cost of houses in Sydney.

Restrictions on lending growth by the Australian Prudential Regulation Authority since the end of 2014 have been designed to give housing supply a chance to catch-up with demand and to maintain the resilience of households against future shocks.

The RBA argues that it needs to balance financial stability risks against the need to stimulate the economy through lower interest rates. But this has left inflation running below the middle of its target range and helps explain why wages growth has been weak.

The official cash rate has been left unchanged since August 2016, the longest period of steady policy rates on record. The fact that inflation has undershot its target of 2-3% is the most straightforward evidence that monetary policy has been too restrictive.

While long-term interest rates in the US continue to rise, reflecting expectations for stronger economic growth and higher inflation, Australia’s long-term interest rates have languished.

Australian long-term interest rates are below those in the US by the largest margin since the early 1980s. This implies the Australian economy is expected to underperform that of the US in the years ahead.

Inflation expectations (implied by Australia’s long-term interest rates) have been stuck around 2% in recent years, below the Reserve Bank’s desired average for inflation of 2.5%.

Financial markets can be forgiven for thinking the RBA will not hit the middle of its 2-3% target range any time soon. The RBA doesn’t believe it will either, with its deputy governor Guy Debelle repeating the word “gradual” no less than 12 times in a speech when describing the outlook for inflation and wages.

Inflation has been below the midpoint of the target range since the December quarter in 2014. On the RBA’s own forecasts inflation isn’t expected to return to the middle of the target range over the next two years.

The Reserve Bank blames low inflation on slow wages growth, claiming in its most recent statement on monetary policythat “labour costs are a key driver of inflationary pressure”. But this is putting the cart before the horse.

In fact, recently published research shows that it is low inflation expectations that are largely to blame for low wages growth.

Workers and employers look at likely inflation outcomes when negotiating over wages. These expectations are in turn driven by perceptions of monetary policy.

Below target inflation makes Australia less resilient to economic shocks, not least because it works against the objective of stabilising the household debt to income ratio. Subdued economic growth and inflation also gives the economy a weaker starting point if and when an actual shock does occur, potentially exacerbating a future downturn.

When the RBA governor and the federal treasurer renegotiate their agreement on monetary policy after the next election, the treasurer should insist on reinstating the wording of the 2010 statement that explicitly prioritised the inflation target over financial stability risks.

If the RBA continues to sacrifice its inflation target on the altar of financial stability risks, inflation expectations and wages growth will continue to languish and the economy underperform its potential.

Author: Stephen Kirchner, Program Director, Trade and Investment, United States Studies Centre, University of Sydney