Is COVID-19 the unfortunate catalyst for global fiscal stimulus?

Economists have been calling for fiscal stimulus for years. The fact that interest rates are so low around the world means that the private sector doesn’t have enough productive uses for the massive quantities of savings sloshing around the global financial system. Government is required to absorb it, directly stimulating activity with its own investments, and indirectly catalysing further private sector activity. This process would support growth in productivity and wages, help bring interest rates back to ‘normal’ levels, and provide greater central bank ammunition for the next downturn.

Unfortunately, many governments have been unwilling to do this, despite record low borrowing costs and no shortage of investment opportunities – infrastructure, structural reforms like housing taxation, investments in skills and education, even just increased funding for the social safety net.

Why this unwillingness?

Traditional economic downturns, such as those originating from a stock market or housing market crash, can often be viewed as ‘natural’ events requiring correction. Governments may use this ‘necessary correction’ argument to avoid significant costly stimulus (ironically potentially making their budget situation worse, especially long term).

When central banks raise interest rates too fast, thereby tripping up the economy, government can similarly avoid blame and therefore responsibility for stimulus.

Then there is the more simple ‘fiscal responsibility’ argument, that even in the face of high unemployment and recession, governments should ‘live within their means’. The US and EU fell into this trap much too quickly following the GFC, resulting in a sluggish recovery for the US and a true repetition of the Great Depression for Europe. Cutting the recovery short ironically also made national budget situations worse, especially over the long term. Until recently, Australia was falling for a similar argument, preferencing a budget surplus over stimulus for a sluggish economy.

This time, the correction is almost entirely government-mandated – shut downs of entire industries, workers quarantined, drastic trade and travel restrictions. There is no escaping the fact that the government has literally chosen to crash the economy in order to focus on defeating a much larger enemy. This means, for the government, there is no escaping responsibility for building a “bridge”, supporting the economy and the people through the storm, and catalysing a proper recovery as soon as possible. Anything less will unambiguously be viewed as a monumental failure of government who can’t dismiss the situation as a ‘necessary correction’.

Government seems to understand this so far, with massive stimulus and support announced around the world. The Australian government and RBA have announced a combined $189 billion worth of support; $12.1 billion from the NZ government plus additional support from RBNZ; and potentially trillions in the US. Even Germany, the epitome of fiscal prudence, has abandoned its “schwarze Null” balanced budget rule and announced up to 350 billion Euros worth of new debt to combat the pandemic.

Government spending may not just be for tying people over until the pandemic is contained, and then simply putting them back to work in the same economy as before the pandemic. New infrastructure projects can also be fast-tracked to employ a less-than-fully-utilised construction workforce. Once the private sector returns to normal, they will have a whole plethora of new infrastructure upon which to capitalise. It won’t just be a return to normal. It will be a return to an economy with significantly more productive capacity.

The government could create a new golden age of economic activity by using the sudden absence of private sector activity in the short term to undertake all the investments for which economists have been calling for years. It will probably not be enough to fully offset the coming downturn but in the near future, the combination of returning private sector activity and new public infrastructure capacity will set the scene for an economy even stronger than it was before the pandemic.

It is a shame that it may be a pandemic that is the catalyst for this economic stimulus but even a crisis can be an opportunity for something great.

We need a global fiscal push.

I’ve written many times before (at least here, here and here about the need for Australia’s government to pull the fiscal levers more to support the economy. The RBA has all but exhausted the monetary levers. Interest rates are nearing zero and risk creating an asset price bubble in the property market and/or the stock market. Even the Governor of the RBA Philip Lowe acknowledges that “it won’t generate medium term growth and just risks pushing up asset prices”. That’s why we need the government to fast-track more infrastructure investment, enact more training and skills development programs, undertake tax reforms in areas such as housing, and offer private sector investment incentives.

But it still won’t be enough.

Australia could do everything right. The government could go on the most well-targeted unprecedented spending spree in our history. Economic growth could push up over 3 per cent again. Unemployment could fall under the RBA’s 4.5 per cent target. Productivity could start accelerating. Wage growth too could once again have a three in front of it. Even inflation could return to the RBA’s 2-3 per cent target range.

But interest rates will still be too low.

Low interest rates are a global phenomenon. There are enormous amounts of savings sloshing around the global financial system looking for returns. Households and businesses are indeed borrowing it (every dollar of savings naturally represents a dollar of borrowing somewhere in the world – it has to) but it’s not productive investment. Too much of it is speculative. If it were productive, it would generate solid returns and would drive up interest rates. This isn’t happening. The private sector alone can’t find enough productive investments and governments aren’t bold enough to go on an infrastructure spree. Hence low interest rates and bubble-susceptible asset markets.

Australia can’t fight this trend alone. If global interest rates are low, ours will be too, even if our economy is running as well as possible.

This is the problem. During the good times, we want central bank interest rates to be at least 4 per cent. Before the GFC in Australia, they were 7.25 per cent! By some estimates today, good times would only deliver 2-3 per cent interest rates. The reason this is a problem is that during a downturn, it doesn’t leave the central bank much room to cut interest rates to stimulate the economy (unless they wanted to target a higher inflation rate – see my previous work here). This lack of ammunition would once again put the burden on the less efficient and less timely political process to boost the economy – something that independent central banks were supposed to largely mitigate.

This is why we need … A GLOBAL FISCAL PUSH. Trillions of dollars can be borrowed by national governments all over the world at near zero per cent interest rates. Some governments can borrow at LESS than zero. Even mortgage holders in Denmark are enjoying negative interest rates of -0.5 per cent – yes, their monthly bank statement literally includes an interest payment FROM THE BANK TO THE BORROWER! This is unprecedented and our grandchildren won’t believe it – so keep your bank statements as evidence.

I’m old enough to remember a time when it was unthinkable that we couldn’t convince governments to spend MORE and we may be seeing the tide turning. The European Central Bank is increasingly putting pressure on its national governments to spend up big. Even fiscally conservative governments like Germany and the Netherlands are reconsidering their balanced budget rules in light of the ridiculous cheapness of borrowing and the fact that the EU may already be in recession.

And there’s no shortage of projects that could be financed. In Australia, the pipeline of potential public transport projects is virtually endless. In Europe and the US, simply repairing and upgrading existing infrastructure would be a big boost. Given current interest rates, it beggars belief that governments can’t think of a worthwhile way to spend money.

This is one of the biggest moments in the global economy since the 1930s but we don’t need a world war to finish it. We just need governments to invest in their own backyards. It won’t just spur long term economic growth and bring interest rates back up to levels that would provide insurance against the next downturn. It could also show the world what happens when they work together, ushering in a new era of global cooperation that even a decade of insular nationalistic politics hasn’t yet destroyed.

Lowe pleads for government support as RBA running out of ammunition.

The RBA has done a complete 180 in just four months, from a tightening bias in February to passing the first of two consecutive cash rate cuts in June.
The RBA’s diminishing effectiveness means they are not expecting a full economic recovery until at least 2021.
RBA Governor Lowe is therefore doing everything he can to encourage further fiscal stimulus and structural reform from the government to more quickly absorb the economy’s spare capacity.

Back in February, the Governor of the RBA Philip Lowe said “the next move in interest rates is more likely to be up rather than down”. Since then, inflation has continued to disappoint on the downside and unemployment has crept up despite ongoing employment growth. The economy has continued to underperform with sluggish growth in household incomes and the cooling housing market depressing dwelling investment and tightening household budgets. Just as importantly too, the RBA reduced its estimate of the unemployment rate that is needed to drive up wage growth and inflation from 5 per cent to less than 4.5 per cent.

By June, this disappointing progress towards their own (suddenly more ambitious) targets forced the RBA’s hand. The cash rate was cut by 25 basis points – the first change in almost three years – then again in July to the current record low 1 per cent. The RBA is now waiting to see how these cuts – plus recent tax cuts, changes to lending regulations, the surprise election result and several international developments – play out across the economy before deciding upon further action.

What is particularly telling though is that the RBA is not forecasting wage growth, inflation and unemployment to reach target until at least 2021. Given how long they have already spent missing their targets, why wouldn’t the RBA try to accelerate this recovery?

Because the RBA knows it is running out of ammunition. It simply can’t (or won’t) accelerate the recovery any faster than this. At this point their ability to absorb the remaining slack in the economy is already diminishing. Governor Lowe himself, in his Opening Statement to the House of Representatives Standing Committee on Economics said “it is certainly true that, in the current environment … monetary policy is less effective than it used to be”.

At their current low levels, further cuts to interest rates are unlikely to be fully passed on to mortgage holders. Many lenders have already dropped the rates they pay on savers’ deposits (close) to zero so they won’t be able to offset many more cuts to their lending rates. Quantitative easing has been discussed as a means to reduce interest rates on longer term assets but generally only in response to a financial crisis or sudden exogenous shock to the macro-economy rather than merely a prolonged period of moderate sluggishness.

Another key channel through which a lowering of interest rates stimulates the economy – by pushing down the exchange rate and supporting exports – is also being undermined. Every major central bank in the world is expected to cut interest rates in the next six months. In addition to ourselves, the US, New Zealand, India and Thailand have already started – NZ by a market-shocking 0.5 per cent. The European Central Bank, the Bank of Japan, the People's Bank of China, the Bank of England and the Bank of Canada are expected to join soon. This means the exchange rate impact of any cuts to our own interest rates is being reversed by the same actions by other central banks – a phenomenon many are now dubbing a ‘currency war’. While cutting interest rates still has the benefit of shoring up access to affordable credit and boosting household disposable income even without the exchange rate channel, its stimulatory effect is diminished.

This is why for several years now Governor Lowe has been putting increasing pressure on government to undertake infrastructure investment and microeconomic reform. Perhaps the earlier experience of the US and EU at the zero lower bound made Governor Lowe wary of Australia reaching this point several years ago. In an attempt to not overstep his jurisdiction, Governor Lowe may have been very explicit in his recent testimony in saying that he wasn’t making “recommendations” to the government, just providing “options”. But the implication and urgency was clear. And now that we can virtually see the whites of the zero lower bound’s eyes, many other economists have come to the RBA’s aid in also calling for additional fiscal stimulus. This would push the economy back towards target faster – and arguably more effectively – than the RBA acting alone.

After all, actions by the RBA to change interest rates only affect economy-wide spending indirectly. Fiscal stimulus on the other hand is itself an injection of spending – especially during a downturn when it is less likely to crowd out the private sector. Strategic investments also have the added benefit of boosting the economy’s long term productivity. Nor is there a lack of infrastructure in which to invest or reforms to undertake. While there is already a substantial pipeline of State infrastructure work underway in NSW, Victoria and Queensland, capacity constraints are far less binding in States like WA, SA and NT. Moreover there are regional and smaller projects that can be fast-tracked all over the country that avoid these constraints.

Governor Lowe also advocated structural and productivity reforms including training and skills development.

“A strong, dynamic business sector is the best way of creating jobs and growing the overall economy. We do better if Australia is viewed as a great place to expand, invest, innovate and employ people.”

Reforms to property taxation could also help workers relocate to areas of superior employment prospects. Reforms to industrial relations could bolster business incentives to invest in their productive capacity and expand their workforces. Lowe also pointed to an increase in the Newstart Allowance as a more effective short term boost than the planned tax cut for higher incomes.

The Federal Budget situation is also looking increasingly positive. On the back of the six largest monthly trade surpluses on record – all occurring this year – thanks to the mining export boom, the Government’s promised 2019/20 surplus may even be delivered a year early. By both international and absolute standards, Australia’s Federal Budget is in a great position to provide additional fiscal stimulus to absorb the slack of a struggling economy.

It also isn’t often that government borrowing costs are so low. At this point in time, all governments in Australia can borrow for 10 years at an interest rate under 2 per cent – some much lower still. Rarely does a government have the opportunity to do so much good, so cheaply.

It is also worth pointing out that the current environment of record low borrowing costs is a global phenomenon. Across the advanced world, an ageing population is increasing the desire to save rather than invest. Economic anxiety and previous accumulation of debts are causing individuals to consolidate their budget positions. In China too, with its relatively weak social safety net, individuals have to save and depend on the government to invest. This trend towards saving is holding down global interest rates and means that even after Australia’s economy returns to trend, opportunities will still remain for us to borrow cheaply to finance valuable public and private investments. The world is crying out for investment opportunities and there are no shortage of them, especially for a willing government.

While the market is expecting two further interest rate cuts in the next year, the diminishing effectiveness of the RBA’s shrinking stockpile of ammunition and the Government’s strong budget position strengthens the case for additional fiscal support.

Judith Sloan hits the fallacy trifecta!

Judith Sloan has really outdone herself.

In a recent article in The Australian[1]:

1.     She blames the RBA for the government’s failures.

For several years Judith has criticised the RBA for dropping interest rates down to 1.5 per cent back in the years to August 2016, saying it overheated the housing markets.

The RBA dropped interest rates during this period because the mining boom had ended and the real economy was sluggish. The risk of overheating the housing markets should have been addressed by regulators (through financial oversight) and government through planning for faster housing development to meet demand. Interest rates are a blunt tool to curb asset markets, would need to be raised significantly to do so, and would damage the real economy further in the process.

Any failures during this period were failures of government, not the RBA.

2.     She says the RBA should have raised interest rates in 2017/2018 when “the economy ran relatively well”.

Judith’s words were:

“Why the RBA chose to keep the cash rate so low for over two years as the economy ran relatively well is anyone’s guess. … If there were ever a time to raise the cash rate, it was during 2017 and 2018.”

You mean when inflation (you know, one of the RBA’s official KPIs) was barely touching the bottom of its target band?

You mean when the unemployment rate was far above where we estimated the rate of full employment was even back then and an average of 590,000 people were unnecessarily unemployed?

You mean when the housing market had started to turn down and where, in hindsight, the real economy could have done with some additional stimulus in preparation for the headwinds we now know were coming?

That’s when you think the RBA should have raised interest rates?

Judith even points out that the RBA has failed to meet its inflation target for a long time. How on earth does she see this as a reason to do anything but provide more stimulus, not less?

3.     She falls for the popular fallacy that by raising interest rates a few years ago, the RBA would have more ammunition today to combat the current slowdown or any potential future shock.

This is akin to telling a hiker struggling up a hill to put an extra 10kg of weight in his backpack just so he has something to drop in a few kilometres’ time. Weighing yourself down with unnecessary baggage now doesn’t make it better for you tomorrow. When the economy needs support, we should give it support, not wait for something worse to happen.

If the RBA runs out of ammunition, the government should do its damn job!

·       Further tax cuts could be implemented (not my preference at the moment).

·       Automatic stabilisers that (as the name suggests) automatically kick in when the economy slows could be expanded. A boost to Newstart for example, would provide more support to people who become unemployed during a downturn and avoid the tedious political process at a time when quick decisions are needed.

·       Certain infrastructure projects could be fast-tracked in areas that most need them.

·       Microeconomic reforms to stamp duty or industrial relations to boost productivity could be enacted.

Alternatively we could expand the RBA’s toolkit beyond just indirectly affecting economic activity through interest rates. ‘Helicopter money’ transferred directly from the RBA to households or government would work but would probably create a nasty case of moral hazard where the government expects to be bailed out repeatedly in the future. But their powers could include the ability to invest directly in infrastructure, as I’ve written before.

Even without the ability to lower interest rates further, there is no lack of ammunition – just a lack of will to use it.

The RBA has the right idea. Judith Sloan does not.

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[1] As well as in commentary over the last few years.

Government needs to pick up the slack BEFORE an emergency not after

There is increasing commentary recently about what it would look like if the RBA engaged in quantitative easing (QE) if it runs out of traditional interest rate ammunition.

I am pleased that the RBA is lowering interest rates, making it cheaper for people, households, businesses and governments to borrow. And yet, the talk of QE makes me nervous.

QE essentially involves the RBA entering the market and buying up financial assets. This acts to reduce further the interest rates on more assets across more maturities than could be achieved through the RBA’s usual open market operations with short term securities.

By reducing longer-term interest rates, the RBA will ideally suppress the exchange rate further and stimulate further borrowing and spending by individuals, households, businesses and governments.

Currently borrowers aren’t sufficiently tempted by record low short-term interest rates. Nor are we in the midst of a full-blown financial crisis. Instead it is entirely possible that the biggest obstacle facing them is not the availability of cheap credit but a lack of demand. Individuals aren’t confident about their future wage levels (demand for their labour). Businesses aren’t confident about future sales (demand for their products and services). Governments are also nervous about debt levels.

In such circumstances, ever-cheaper credit won’t necessarily stimulate the real economy. It will more likely over-inflate asset markets, including stocks and housing, as investors become ever more speculative in the face of cheap credit.

This is what makes me nervous. While I'm happy with what the RBA is currently doing, Australia needs a boost that is sustainable, not a speculative one with potentially dangerous fallout.

This is why governments need to step in with fiscal stimulus and structural reform before the RBA runs out of traditional interest rate ammunition. This can include:

-        Progressing with tax cuts and other financial supports for low and middle incomes

-       Bringing forward infrastructure spending, especially the smaller simpler projects that can be started sooner;

-    Reforms such as the replacement of stamp duty, the simplification of building approvals processes and planning frameworks, labour market reforms and incentives for small and medium sizes businesses.

-    APRA also needs to loosen its lending restrictions on banks from a 7 per cent borrower assessment rate to a simple 2.5 per cent buffer above the standard variable rate. This is the main obstacle to access to finance, not the RBA.

Unless governments can’t (or won’t) capitalise on record low interest rates unless the RBA uses QE to reduce them further, QE is likely to distort economic activity with questionable benefits.

Governments need to do this for Australia before the RBA brings out the emergency measures. There is no shortage of worthy recipients for stimulus and the potential consequences of failure are mounting.

The RBA is running out of ammunition and the government must pick up the slack.

The RBA has cut interest rates to a record low with further cuts likely this year.
This was a response to their own internal recalculation of the NAIRU that showed us to be even further from full employment than previously thought.
Add to this the possibility of a sudden actual real-world shock, and monetary policy is dangerously close to the lower bound of its effectiveness.
Government needs to take the hint and use fiscal stimulus and reform before the RBA runs out of ammunition and before wage and inflation expectations make a proper recovery even harder.


The RBA has cut interest rates to a new record low of 1.25 per cent. This was not a response to a sudden new market development. Rather, the RBA has recalculated its estimate of the ‘non-accelerating inflation rate of unemployment’ or NAIRU – the rate of unemployment consistent with low and stable inflation.

Previously the RBA believed the NAIRU was 5.25 per cent and an unemployment rate around 5 per cent would result in stronger inflation and wage growth.

Now they estimate the NAIRU to be around 4.5 per cent and that an unemployment rate even lower than that may be necessary to lift inflation back to within their target range, and improve wage growth for Australian workers.

The RBA consequently cut interest rates in the face of this new understanding and it should help support the economy. This added relief for mortgage holders could result in greater discretionary spending (retail, services, etc.) and additional debt being taken on for things like furniture and vehicle purchases. It should also cause a weakening of the Australian dollar that will improve export profitability and potentially divert some import spending to the employment of any currently-idle domestic resources.

The housing industry should also benefit directly from this. The RBA’s interest rate cuts combined with APRA’s potential reduction in lending ‘buffers’ should make new home purchases available to people who previously couldn’t access it. Greater borrowing capacity (and willingness) will support the home building and renovations industry.

Perhaps just as importantly, this new stimulatory environment is here to stay for an extended period. As recently as December last year, the RBA was forecasting that the next interest rate move was more likely to be upwards than downwards. Now, just six months later, the RBA has cut interest rates and there are probably more cuts coming. Downside risks are likely to continue into 2020 and beyond.

Moreover, the RBA may run out of interest rate ammunition before having returned the economy to the path towards full employment. Without a sudden positive international development or more ambitious fiscal response, this sets the scene for a somewhat impotent RBA, a prolonged period of economic underperformance and a low interest rate environment continuing for the foreseeable future. The government’s own wage and inflation forecasts – upon which much of their budget is based – could also be in jeopardy.

While low interest rates are, on the face of it, good for the housing industry, if they are a response to ongoing weakness in the broader economy and therefore, limited demand for housing, even the housing industry won’t be smiling.

Add to this the possibility of a sudden actual real-world shock, and monetary policy is dangerously close to the lower bound of its effectiveness. Estimates suggest that once the RBA reaches a cash rate of 0.5 per cent, further cuts won’t be stimulatory because the transmission mechanism would have been exhausted. Even quantitative easing has had mixed results around the world and may not be the economic panacea we would need.

Government needs to take the hint and use fiscal stimulus before the RBA runs out of ammunition and before wage and inflation expectations make a proper recovery even harder. Incoming tax cuts will be of great help and there is scope to bring forward some of the government's smaller and simpler infrastructure projects for immediate commencement. Federal infrastructure investment levels in general could also be even more ambitious – with appropriate costing and consideration for potential projects.

There is also scope for microeconomic reforms that improve productivity and efficiency across the economy. The replacement of stamp duty with a broader based land tax – or consumption tax like the GST – would be particularly beneficial for the struggling housing industry:

• It would facilitate downsizing for retirees, making larger homes available for new younger families;
• It would facilitate a more mobile and flexible workforce with people able to more easily relocate where jobs are available;
• It would provide State governments with a more stable source of revenue than stamp duties that tend to dry up just as the economy is in need of stimulus;
• It would help alleviate the intergenerational inequality that can emerge when one generation is lucky enough to be invested in the property market before a record-breaking boom.

Government has no excuse to sit on its hands. There is no shortage of productive investments and reforms to undertake, especially with borrowing costs so low – and falling.

While the story of independent central banks has been one of success for the last quarter century, monetary policy is not without its limits. It was never intended to entirely bail out the government from its responsibility for macroeconomic management. The coming years will test the government’s willingness and ability to pick up the economic slack that has emerged.

The Holy Quintet

5 Factors to Rescue the Australian Economy

In quick succession, five factors have come together that could officially end Australia’s economic downturn – the election, property tax policy, tax cuts, APRA and the RBA.
But true to form – and despite the expert consensus – I think the RBA will wait to see how things play out.

The RBA meets today for its June Monetary Policy meeting and virtually everyone is predicting an interest rate cut.

Except me. Just as it has for the last 33 months, I think the RBA will hold fire.

Not because I don’t think they should cut – I think they should have cut six months ago. The Australian economy has been slowing since mid-2018. House prices have been declining since late 2017 so the risk of overheating the housing market with lower interest rates has gone. Credit is tight. Inflation has undershot the RBA’s target range for years. Wage growth has underwhelmed despite strong employment growth and low unemployment rates. GDP growth rates for the last two quarters (and leading indicators for the March 2019 quarter) have also disappointed.

So why wouldn’t the RBA cut interest rates? Because in quite quick succession, four other factors have come together that could officially end Australia’s economic downturn:

1. The election. There is always uncertainty surrounding a Federal election. Activity in the property industry tends to slow down around this period as investors and owner-occupiers wait it out to see if there are any drastic tax or legislative changes that could affect their purchase decisions. With the outcome of the election now settled, this uncertainty is now over.
2. Negative gearing and capital gains tax. This election was also more relevant to the property industry than any usual election. Labor’s planned changes to negative gearing and capital gains tax would have put further downward pressure on demand for housing, house prices and construction activity. At a time when confidence is shaky and there are concerns about the prospect of a hard landing for the property market, any further (even small) shock to the sector could trigger a crisis of confidence and a steep downward spiral for not just the property market but also the broader economy. That would mean many more people unemployed and slower (even backwards) wage growth for those that retain their jobs. With Labor’s defeat and the conservative incumbents retaining power, these specific concerns are now off the board.
3. Fiscal stimulus. During the Federal Budget in April, significant fiscal stimulus was announced by the government. This included $7.5 billion in tax cuts for 2019/20 and similar in 2020/21, plus $100 billion in infrastructure spending over the coming decade. A significant portion of these tax cuts will also be given to the middle and lower end of the income spectrum where they are most likely to be spent (e.g. retail, services) and boost economic activity. Recent estimates have put the positive economic impact of these tax cuts as equivalent to a 0.5 per cent interest rate cut by the RBA, around the same as the Rudd Government’s ‘cash splash’ during the GFC. This is a timely stimulus given weak recent economic growth, inflation and wages.
4. APRA also made an announcement last week that could officially end the credit squeeze. Until now, APRA has required that banks assess potential mortgage-holders against an interest rate of 7 per cent. To be even more conservative, banks adopted a 7.25 per cent assessment benchmark. This was tightening the supply of credit drastically. Now APRA has indicated it will remove its 7 per cent rule in favour of banks adding just 2.5 per cent to the going mortgage rate. This could bring the assessment rate down by a full percentage point and should loosen the supply of credit and foster greater activity in the housing sector. There will also potentially be fewer defaults on previous sales that are soon to seek finance on land or dwellings that have subsequently lost some of their value in the face of falling prices.

This is a fortuitous confluence of factors that may continue Australia’s run towards 30 years of continuous recession-free economic growth and help us truly earn the title of ‘the lucky country’.

The RBA could make it five – the ‘Holy Quintet’. But for now, I wager that ‘Philip the Patient’ will remain just that.

Philip Lowe indicated last week that the RBA will “consider the case for lower interest rates” in June – hardly conclusive but the market took this as his strongest indication yet and is now 100 per cent sure that the first change of interest rates since August 2016 almost three years ago is going to happen today. Market expectations of two interest rate cuts this year have been reinforced and even brought forward. If correct, this would bring RBA interest rates to a new record low of just 1 per cent. This added relief for mortgage holders could result in greater discretionary spending (retail, services, etc.) and additional debt being taken on for home, renovation, or vehicle purchases. It should also cause a weakening of the Australian dollar that will improve export profitability and potentially divert some import spending to the employment of any currently-idle domestic resources.

But given the above four factors, I think the RBA will wait to see how they play out first. Maybe they want to leave some interest rate ammunition in reserve in case of a significant new domestic or international shock (not a strategy with which I agree, but still). Maybe they want to avoid encouraging heavily-indebted households to take on more debt (unlikely to happen in current circumstances, in my opinion). Maybe they genuinely believe a cut isn’t necessary and/or won’t help (again, I disagree). Nevertheless, I hope their patience is vindicated.

A lot is riding on it.