Month: February 2015

FCC And Net Neutrality

Net neutrality is important because it means that internet service providers need to make all content available from providers to consumers without any differentiation in terms of charging or quality of service for different types of traffic. It can apply to content including telephony, web browsing, video, television, and other digital services. Following legal battles in the USA, the Federal Communications Commission has set sustainable rules of the roads that will protect free expression and innovation on the Internet and promote investment in the nation’s broadband networks. It is an important stake in the ground, and means the internet will be more open, not less. So far as Australia is concerned, we think it is time to consider the right neutrality settings here. Today we have rules which assume television broadcasting is different from other content, and various barriers which limit competition, consumer choice, and keep content pricing higher than they should be. Given the emerging role of the NBN, It’s time that Australia carried out a broad based review into net neutrality and how it should be applied to the local telecommunications and content provider industries.

Here are details of the US announcement.

The FCC has long been committed to protecting and promoting an Internet that nurtures freedom of speech and expression, supports innovation and commerce, and incentivizes expansion and investment by America’s broadband providers. But the agency’s attempts to implement enforceable, sustainable rules to protect the Open Internet have been twice struck down by the courts.

The Commission—once and for all—enacts strong, sustainable rules, grounded in multiple sources of legal authority, to ensure that Americans reap the economic, social, and civic benefits of an Open Internet today and into the future. These new rules are guided by three principles: America’s broadband networks must be fast, fair and open—principles shared by the overwhelming majority of the nearly 4 million commenters who participated in the FCC’s Open Internet proceeding. Absent action by the FCC, Internet openness is at risk, as recognized by the very court that struck down the FCC’s 2010 Open Internet rules last year in Verizon v. FCC.

Broadband providers have economic incentives that “represent a threat to Internet openness and could act in ways that would ultimately inhibit the speed and extent of future broadband deployment,” as affirmed by the U.S. Court of Appeals for the District of Columbia. The court upheld the Commission’s finding that Internet openness drives a “virtuous cycle” in which innovations at the edges of the network enhance consumer demand, leading to expanded investments in broadband infrastructure that, in turn, spark new innovations at the edge.

However, the court observed that nearly 15 years ago, the Commission constrained its ability to protect against threats to the open Internet by a regulatory classification of broadband that precluded use of statutory protections that historically ensured the openness of telephone networks. The Order finds that the nature of broadband Internet access service has not only changed since that initial classification decision, but that broadband providers have even more incentives to interfere with Internet openness today. To respond to this changed landscape, the new Open Internet Order restores the FCC’s legal authority to fully address threats to openness on today’s networks by following a template for sustainability laid out in the D.C. Circuit Opinion itself, including reclassification of broadband Internet access as a telecommunications service under Title II of the Communications Act.

With a firm legal foundation established, the Order sets three “bright-line” rules of the road for behavior known to harm the Open Internet, adopts an additional, flexible standard to future-proof Internet openness rules, and protects mobile broadband users with the full array of Open Internet rules. It does so while preserving incentives for investment and innovation by broadband providers by affording them an even more tailored version of the light-touch regulatory treatment that fostered tremendous growth in the mobile wireless industry.

Following are the key provisions and rules of the FCC’s Open Internet Order:

New Rules to Protect an Open Internet

While the FCC’s 2010 Open Internet rules had limited applicability to mobile broadband, the new rules—in their entirety—would apply to fixed and mobile broadband alike, recognizing advances in technology and the growing significance of wireless broadband access in recent years (while recognizing the importance of reasonable network management and its specific application to mobile and unlicensed Wi-Fi networks). The Order protects consumers no matter how they access the Internet, whether on a desktop computer or a mobile device.

Bright Line Rules: The first three rules ban practices that are known to harm the Open Internet:

  • No Blocking: broadband providers may not block access to legal content, applications, services, or non-harmful devices.
  • No Throttling: broadband providers may not impair or degrade lawful Internet traffic on the basis of content, applications, services, or non-harmful devices.
  • No Paid Prioritization: broadband providers may not favor some lawful Internet traffic over other lawful traffic in exchange for consideration of any kind—in other words, no “fast lanes.” This rule also bans ISPs from prioritizing content and services of their affiliates.

The bright-line rules against blocking and throttling will prohibit harmful practices that target specific applications or classes of applications. And the ban on paid prioritization ensures that there will be no fast lanes.

A Standard for Future Conduct:

Because the Internet is always growing and changing, there must be a known standard by which to address any concerns that arise with new practices. The Order establishes that ISPs cannot “unreasonably interfere with or unreasonably disadvantage” the ability of consumers to select, access, and use the lawful content, applications, services, or devices of their choosing; or of edge providers to make lawful content, applications, services, or devices available to consumers. Today’s Order ensures that the Commission will have authority to address questionable practices on a case-by-case basis, and provides guidance in the form of factors on how the Commission will apply the standard in practice.

Greater Transparency:

The rules described above will restore the tools necessary to address specific conduct by broadband providers that might harm the Open Internet. But the Order recognizes the critical role of transparency in a well-functioning broadband ecosystem. In addition to the existing transparency rule, which was not struck down by the court, the Order requires that broadband providers disclose, in a consistent format, promotional rates, fees and surcharges and data caps. Disclosures must also include packet loss as a measure of network performance, and provide notice of network management practices that can affect service. To further consider the concerns of small ISPs, the Order adopts a temporary exemption from the transparency enhancements for fixed and mobile providers with 100,000 or fewer subscribers, and delegates authority to our Consumer and Governmental Affairs Bureau to determine whether to retain the exception and, if so, at what level. The Order also creates for all providers a “safe harbor” process for the format and nature of the required disclosure to consumers, which the Commission believes will lead to more effective presentation of consumer-focused information by broadband providers.

Reasonable Network Management:

For the purposes of the rules, other than paid prioritization, an ISP may engage in reasonable network management. This recognizes the need of broadband providers to manage the technical and engineering aspects of their networks.

  • In assessing reasonable network management, the Commission’s standard takes account of the particular engineering attributes of the technology involved—whether it be fiber, DSL, cable, unlicensed Wi-Fi, mobile, or another network medium.
  • However, the network practice must be primarily used for and tailored to achieving a legitimate network management—and not business—purpose. For example, a provider can’t cite reasonable network management to justify reneging on its promise to supply a customer with “unlimited” data.

Broad Protection

Some data services do not go over the public Internet, and therefore are not “broadband Internet access” services (VoIP from a cable system is an example, as is a dedicated heart-monitoring service). The Order ensures that these services do not undermine the effectiveness of the Open Internet rules. Moreover, all broadband providers’ transparency disclosures will continue to cover any offering of such non-Internet access data services—ensuring that the public and the Commission can keep a close eye on any tactics that could undermine the Open Internet rules.

Interconnection: New Authority to Address Concerns

For the first time the Commission can address issues that may arise in the exchange of traffic between mass-market broadband providers and other networks and services. Under the authority provided by the Order, the Commission can hear complaints and take appropriate enforcement action if it determines the interconnection activities of ISPs are not just and reasonable.

Legal Authority: Reclassifying Broadband Internet Access under Title II

The Order provides the strongest possible legal foundation for the Open Internet rules by relying on multiple sources of authority including both Title II of the Communications Act and Section 706 of the Telecommunications Act of 1996. At the same time, the Order refrains – or forbears – from enforcing 27 provisions of Title II and over 700 associated regulations that are not relevant to modern broadband service. Together Title II and Section 706 support clear rules of the road, providing the certainty needed for innovators and investors, and the competitive choices and freedom demanded by consumers, while not burdening broadband providers with anachronistic utility-style regulations such as rate regulation, tariffs or network sharing requirements.

  • First, the Order reclassifies “broadband Internet access service”—that’s the retail broadband service Americans buy from cable, phone, and wireless providers—as a telecommunications service under Title II. This decision is fundamentally a factual one. It recognizes that today broadband Internet access service is understood by the public as a transmission platform through which consumers can access third-party content, applications, and services of their choosing. Reclassification of broadband Internet access service also addresses any limitations that past classification decisions placed on the ability to adopt strong open Internet rules, as interpreted by the D.C. Circuit in the Verizon case. And it supports the Commission’s authority to address interconnection disputes on a case-by-case basis, because the promise to consumers that they will be able to travel the Internet encompasses the duty to make the necessary arrangements that allow consumers to use the Internet as they wish.
  • Second, the proposal finds further grounding in Section 706 of the Telecommunications Act of 1996. Notably, the Verizon court held that Section 706 is an independent grant of authority to the Commission that supports adoption of Open Internet rules. Using it here—without the limitations of the common carriage prohibition that flowed from earlier the “information service” classification—bolsters the Commission’s authority.
  • Third, the Order’s provisions on mobile broadband also are based on Title III of the Communications Act. The Order finds that mobile broadband access service is best viewed as a commercial mobile service or its functional equivalent.

Forbearance: A modernized, light-touch approach

Congress requires the FCC to refrain from enforcing – forbear from – provisions of the Communications Act that are not in the public interest. The Order applies some key provisions of Title II, and forbears from most others. Indeed, the Order ensures that some 27 provisions of Title II and over 700 regulations adopted under Title II will not apply to broadband. There is no need for any further proceedings before the forbearance is adopted. The proposed Order would apply fewer sections of Title II than have applied to mobile voice networks for over twenty years.

• Major Provisions of Title II that the Order WILL APPLY:

  • The proposed Order applies “core” provisions of Title II: Sections 201 and 202 (e.g., no unjust or unreasonable practices or discrimination)
  • Allows investigation of consumer complaints under section 208 and related enforcement provisions, specifically sections 206, 207, 209, 216 and 217
  • Protects consumer privacy under Section 222
  • Ensures fair access to poles and conduits under Section 224, which would boost the deployment of new broadband networks
  • Protects people with disabilities under Sections 225 and 255
  • Bolsters universal service fund support for broadband service in the future through partial application of Section 254.

• Major Provisions Subject to Forbearance:

  • Rate regulation: the Order makes clear that broadband providers shall not be subject to utility-style rate regulation, including rate regulation, tariffs, and last-mile unbundling.
  • Universal Service Contributions: the Order DOES NOT require broadband providers to contribute to the Universal Service Fund under Section 254. The question of how best to fund the nation’s universal service programs is being considered in a separate, unrelated proceeding that was already underway.
  • Broadband service will remain exempt from state and local taxation under the Internet Tax Freedom Act. This law, recently renewed by Congress and signed by the President, bans state and local taxation on Internet access regardless of its FCC regulatory classification.
    Effective Enforcement
  • The FCC will enforce the Open Internet rules through investigation and processing of formal and informal complaints
  • Enforcement advisories, advisory opinions and a newly-created ombudsman will provide guidance
  • The Enforcement Bureau can request objective written opinions on technical matters from outside technical organizations, industry standards-setting bodies and other organizations.

Fostering Investment and Competition

All of this can be accomplished while encouraging investment in broadband networks. To preserve incentives for broadband operators to invest in their networks, the Order will modernize Title II using the forbearance authority granted to the Commission by Congress—tailoring the application of Title II for the 21st century, encouraging Internet Service Providers to invest in the networks on which Americans increasingly rely.

  • The Order forbears from applying utility-style rate regulation, including rate regulation or tariffs, last-mile unbundling, and burdensome administrative filing requirements or accounting standards.
  • Mobile voice services have been regulated under a similar light-touch Title II approach, and investment and usage boomed.
  • Investment analysts have concluded that Title II with appropriate forbearance is unlikely to have any negative on the value or future profitability of broadband providers. Providers such as Sprint, Frontier, as well as representatives of hundreds of smaller carriers that have voluntarily adopted Title II regulation, have likewise said that a light-touch, Title II classification of broadband will not depress investment.

Mortgage Arrears Higher In Mining Post Codes – Fitch

Fitch Ratings says in a new report that a reduction in mining investment and slower mining industry employment has resulted in higher delinquency rates over the past 18 months in areas where a significant population is employed in the industry, compared with delinquencies in non-mining areas.

Only 0.8% of Australian mortgages are located in mining postcodes (defined by Fitch as postcodes in which more than 20% of residents worked in the mining industry – employment based on 2011 census data). As a result, mortgages in Australia performed well overall, thanks to the stable economy, steady unemployment rate and record-low mortgage rates.

While Fitch expects the rapid change in industry dynamics that has occurred in the mining sector to impact both mortgage delinquencies and local property markets, Australian RMBS transactions are typically well-diversified geographically. As a result, Fitch does not expect the fall in mining employment to have a material effect on securitised portfolios and does not expect it to affect RMBS ratings in the medium term.

 

The Reform Imperative

John Fraser, Secretary to the Treasury spoke today to the Committee for Economic Development of Australia (CEDA). The speech, “Australia’s Economic Policy Challenges” outlined some important priorities for economic reform, as well as setting out the background to the reform imperative.

Boosting productivity will require improvements across all markets – input markets such as the labour market, financial markets, and infrastructure markets as well as final goods and services markets. Failure to undertake necessary reforms in related markets will mean that the potential benefits of reform in any single market are not realised. The Government has commissioned a number of policy reviews that will recommend ways to enhance Australia’s economic prosperity. Making the most of these reform opportunities is essential, where three areas stand out as priorities for raising Australia’s productivity performance.

The first is tax reform.

Studies have consistently shown that tax reform offers one of the largest policy opportunities to increase incomes and living standards. And the fact is that the structure of our tax system today looks remarkably like it did back in the 1950s — but our economy looks very different. That may tell us something. Tax reform can promote strong investment and encourage workforce participation. Our company tax rate is high by international standards. In the context of far more mobile capital, high tax rates are dampening investment and productivity, while continuing personal income tax bracket creep would have negative impacts on workforce participation and incentives. An important criterion for a well-functioning tax system is fairness, where there are some contentious and important issues that need to be explored. For example, substantial tax assistance is provided to superannuation savings. We need to consider whether the level and distribution of these concessions remains appropriate. These are the types of issues that will be considered in the upcoming Tax White Paper.

A second priority is continuing to modernise the workplace relations system.

Workplace regulation has been progressively and substantially reformed in recent decades. Many of the fundamental reforms were undertaken in the 1980s and 1990s, in particular the shift from centralised wage fixing to enterprise bargaining. These reforms have delivered substantial benefits. But elements of our workplace relations system may need to change to fit the workplaces of our future. The Productivity Commission’s Inquiry into the Workplace Relations Framework to be delivered later this year will be an important opportunity to create a modern system that will support jobs, promote productivity and lift living standards. A more flexible workplace relations system that supports the economy will help Australia respond to the challenge of lifting productivity growth. The rise of Asia, the ageing of the population and the transition away from resource-led growth will require significant adjustment. It is especially important that workplace laws are not impeding workplace transformation.

A third priority area for structural reform is driving greater competition in goods and services markets.

Previous product market reforms, and those associated with the Hilmer review in the 1990s, pushed competition into non-tradable sectors like electricity, telecommunications and rail freight. These were important changes, contributing to a GDP increase of around 2½ percentage points over the course of that decade. The proposals in Ian Harper’s draft report released in late 2014 provide the opportunity to boost Australia’s productivity performance. The final report will be released in March. Ian Harper proposes that we apply competition law and a new set of competition principles to all purchasing activities of government such as health, education and aged care. Even small improvements here, where government has a large footprint and where Australia’s population will impose greater demands on health and aged care, can deliver big benefits over time. The importance of strengthening competition was also a theme of the Financial System Inquiry. The Inquiry concludes that competition and competitive markets are at the heart of the philosophy of the financial system and the primary means of supporting the system’s efficiency. We must ensure that our banking and financial system more generally are more competitive. The Inquiry also recognised that, as the financial system becomes increasingly sophisticated and innovative, the importance of receiving appropriate financial advice and access to appropriate and competitively priced products has increased.

These are challenging issues and will require the Commonwealth and the State governments to work together.

Home Lending Up To $1.43 Trillion

Latest data from the RBA shows that home lending is worth $1.43 trillion, to end January. In the month, lending rose $8.5 billion, or 0.6%. However, investment home lending grew at 0.8%, whilst owner occupied lending grew at 0.49%. Investment lending was at a record 34.3% of total housing.

HousingAggregatesJan2015More broadly, total lending was up 0.6% from last month, and 6.2% year on year. The share of lending to business continued to fall as a share of total lending, now down to one third of all funds borrowed. This needs to be lifted if sustainable growth is to be delivered. Banks are biased toward ever more home lending, thanks to lower losses and advantaged capital requirements.

CreditAggregatesJan2015

Groupthink Stems From The Council of Financial Regulators

Behind the scenes, it is the mysterious Council of Financial Regulators which is coordinating activity across the Reserve Bank, APRA, AISC and Treasury. This body, is the conductor of the regulatory orchestra, and although formed initially in 1998, it has only had an independent website since 2013.  It is the coordinating body for Australia’s main financial regulatory agencies. It is a non-statutory body whose role is to contribute to the efficiency and effectiveness of financial regulation and to promote stability of the Australian financial system. The Reserve Bank of Australia (RBA) chairs the Council and members include the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC), and The Treasury. The Council of Financial Regulators (CFR) comprises two representatives – the chief executive and a senior representative – from each of these four member agencies.

The CFR meets in person quarterly or more often if circumstances require it. The meetings are chaired by the RBA Governor, with secretariat support provided by the RBA. In the CFR, members share information, discuss regulatory issues and, if the need arises, coordinate responses to potential threats to financial stability. The CFR also advises Government on the adequacy of Australia’s financial regulatory arrangements. A formal charter was only adopted on 13 January 2014.

The Council of Financial Regulators (CFR) aims to facilitate cooperation and collaboration between the Reserve Bank of Australia, the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission and The Treasury. Its ultimate objectives are to contribute to the efficiency and effectiveness of regulation and to promote stability of the Australian financial system.

The CFR provides a forum for:

  • identifying important issues and trends in the financial system, including those that may impinge upon overall financial stability;
  • ensuring the existence of appropriate coordination arrangements for responding to actual or potential instances of financial instability, and helping to resolve any issues where members’ responsibilities overlap; and
  • harmonising regulatory and reporting requirements, paying close attention to the need to keep regulatory costs to a minimum.

So, given the intended independence of the RBA, from Government, there is an important question to consider. How can this be seen to be true? More likely, we think there is significant potential for groupthink. In addition, no minutes of discussions are made public. We think its time for greater transparency and openness.

“Sunlight is said to be the best of disinfectants; electric light the most efficient policeman” said U.S. Supreme Court Justice Louis Brandeis. We agree.

Reforms to the Bank of England’s Market Intelligence programme

Some central banks, including the Bank of England, have moved away from an era of ‘constructive ambiguity’ to greater openness and transparency. The RBA is less transparent, and the Australian Regulatory system is opaque and largely still done behind closed doors and quiet whispers. This is because they are too aligned to the major financial services incumbents, and are over focussed on financial stability. In particular the role and activity of the Council of Financial Regulators is completely opaque. So it is interesting to see where the Bank of England is headed.

The Bank of England today announced the outcome of a root-and-branch review of its Market Intelligence (MI) programme. In a speech at Warwick University, Minouche Shafik said the resulting changes – alongside progressive steps to make the Bank’s liquidity insurance framework more transparent – show clearly that the Bank is not just “open for business” but also “open about our business.”

MI is the ongoing process of discussion with financial market participants to identify insights relevant to policymaking.  The Bank’s Governors and Court of Directors endorsed all 11 recommendations stemming from the MI Review, which will make the gathering and use of MI more transparent, robust and effective.  The recommendations include:

  •  A MI Charter which explains clearly the terms of the Bank’s engagement with financial market participants, and its rationale for gathering MI;
  • A strengthened set of policies that govern MI gathering, supported by expanded training for staff; and
  • A new executive-level committee to oversee the MI programme, to ensure it retains the necessary flexibility, focus and relevance to the policy challenges of today and tomorrow.

The Bank of England also today published its formal response to the recommendations of Lord Grabiner, following the publication of his Foreign Exchange Market Investigation Report in November 2014. At the time, the Bank endorsed the recommendations – which covered documentation, education, and the need for greater clarity over the Bank’s market intelligence role – and committed to implementing them in full and as quickly as possible.

In today’s response, the Bank outlined the actions that have been, or are being, taken to fulfil the recommendations. They will result in stronger systems and controls around the Bank’s engagement with market participants.

In a speech on Thursday – Goodbye ambiguity, hello clarity – Bank of England Deputy Governor Minouche Shafik explains why this greater clarity around the Bank of England’s interactions with financial markets is essential.

Central banks, including the Bank of England, have moved away from an era of ‘constructive ambiguity’ to greater openness and transparency.  For example, the Bank now has a well-defined set of facilities for the provision of liquidity to the financial system that have evolved to meet changing needs. The Bank’s dialogue with markets dates back to 1786 but the days of men in top hats and fireside chats are now a distant memory. The Bank’s MI function is a highly professional network of staff covering 23 different markets and sectors, providing first-hand insights on short-term moves and long-term trends relevant to all the Bank’s policy functions.

In the speech, Minouche says:

“The ability of the Bank’s MI function to provide insights to senior policymakers over the past 8 years, as the first waves of the crisis rushed onto the Bank’s doorstep, and then as solutions flowed back out across the system, has been vital to our effectiveness”.

Welcoming the changes to the MI programme announced today, Minouche said:

“The Bank has been at the centre of one of the world’s major financial centres for hundreds of years. Today the Bank has a broader role than ever before. A clear understanding of the root causes of developments in financial markets must underpin the decisions we make about monetary policy and regulation of financial markets. Aligning our Market Intelligence function closely to the Bank’s mission, so that its purpose is clear and its approach is transparent, will ensure we continue to seize that opportunity”.

Capex On The Slide

The ABS data released today shows the continued fall in mining expenditure, and no counterbalancing movement in other sectors. Total new capital expenditure trend estimate was $37,693 m, down 3.9% YOY.

It does not bode well. Business confidence remains low, and given that household debt is still high, we do not expect housing, and households to fill the gap. We are effectively running out of runway as mining investment trails off. So, housing is the only game in town. Given the data now, it is much more likely we will see interest rates lower for longer than previously anticipated. However, the continued reliance on unproductive lending for housing in not a recipe to drive business investment. We need some new thinking on how to stimulate business investment. Our surveys suggest that it is not interest rates which is the problem, so cutting further wont help much. APRA needs to step up here, turn to tap down on housing lending, and make business lending more likely.  The details of the ABS data are summarised below.

  • The trend volume estimate for total new capital expenditure fell 0.8% in the December quarter 2014 while the seasonally adjusted estimate fell 2.2%.
  • The trend volume estimate for buildings and structures fell 1.5% in the December quarter 2014 while the seasonally adjusted estimate fell 2.6%.
  • The trend volume estimate for equipment, plant and machinery rose 0.9% in the December quarter 2014 while the seasonally adjusted estimate fell 1.3%.
  • This issue includes the fifth estimate (Estimate 5) for 2014-15 and the first estimate (Estimate 1) for 2015-16.
  • Estimate 5 for 2014-15 is $152,656m. This is 8.6% lower than Estimate 5 for 2013-14. Estimate 5 is 0.4% higher than Estimate 4 for 2014-15.
  • Estimate 1 for 2015-16 is $109,799m. This is 12.4% lower than Estimate 1 for 2014-15.

 

Funds Under Management Now $2.5 Trillion

ABS released their funds management data to December 2014. The managed funds industry had $2,489.9b funds under management (including some changes to the data capture and revisions), an increase of $57.6b (2%) on the September quarter 2014 figure of $2,432.3b. The main valuation effects that occurred during the December quarter 2014 were:

  • the S&P/ASX 200 increased 2.2%
  •  the price of foreign shares, as represented by the MSCI World Index excluding Australia, increased 0.8%
  • A$ depreciated 6.7% against the US$.

FundsUnderManagementDec2014At 31 December 2014, the consolidated assets of managed funds institutions were $1,958.5b, an increase of $48.8b (3%) on the September quarter 2014 figure of $1,909.7b. The asset types that increased were:

  • overseas assets, $29.6b (8%)
  • shares, $14.6b (3%)
  • short term securities, $8.6b (10%)
  • bonds, etc., $4.3b (4%)
  • derivatives, $0.8b (65%)
  • other non-financial assets, $0.2b (2%).

These were partially offset by decreases in:

  • other financial assets, $3.4b (11%)
  • deposits, $3.2b (1%)
  • land, buildings and equipment, $1.5b (1%)
  • loans and placements, $1.0b (2%)
  • and units in trusts, $0.2b (0%).

FundsAssetsByTypeDec2014At 31 December 2014, there were $503.9b of assets cross invested between managed funds institutions whilst the unconsolidated assets of superannuation (pension) funds increased $54.4b (3%), public offer (retail) unit trusts increased $4.5b (2%), life insurance corporations increased $4.3b (2%), cash management trusts increased $0.8b (3%), and common funds increased $0.2b (2%). Friendly societies were flat.

 

Bank Of England’s Research Agenda

The UK Regulator has announced a broader research agenda, recognising the complexities of the current financial environment. Mark Carney, Governor of the Bank of England spoke at the Launch Conference. His remarks summarise the rationale behind the major research themes. They are worth reading, not least because he highlights that the traditional view of macroeconomic policy is changing.

Transformation of the Bank of England

The central challenge of macroeconomic policymaking in the late 1970s and 1980s was the fight against inflation. In no small part due to my predecessors, particularly Lord King, we have today a regime for maintaining monetary stability that is both democratically legitimate and highly effective. It rests on clear remits, delegated by Parliament, sound governance arrangements to support independence, and effective transparency of policymaking. And it provides valuable lessons for the conduct of other policy functions.

Despite these successes, in both theory and practice, a healthy focus on price stability had become a dangerous distraction. The financial crisis was a powerful reminder that price stability is not sufficient for macroeconomic stability. It exposed the convenient fiction that finance is a veil. And we were taught that the dynamics of lending markets are as important as those of labour markets for our shared prosperity.

In response to these painful lessons, the Bank of England has been bestowed with enormous new responsibilities by Parliament. They now span monetary policy, macroprudential policy, and microprudential supervision. They include responsibility for the United Kingdom’s bank notes; its payments systems; oversight of financial markets infrastructure and resolving failed institutions. To help fulfill its mission the Bank has core roles in Europe, at the G20 and at the Financial Stability Board.

Having monetary, macroprudential, and microprudential policy under one roof makes gains from trade possible. It is our duty to exploit complementarities, synergies and economies of scope to maximise our impact by working together. To do so, we need research. And to some extent, research needs us.

The need for research

The way central banks have sought to achieve their objectives – the practice of central banking – has frequently moved ahead of the theory of central banking. Theory, in turn, subsequently catches up, and enriches and refines practice. The history of central banking is replete with examples. Tacit knowledge has often been more instrumental in determining policy outcomes than insights from formal research. Sometimes this works, as in Bagehot’s ‘dictum’ (to lend freely at a penalty rate against good collateral); and sometimes it doesn’t, as in Research has meant that some modes of operation, like Norman’s, have rightly fallen by the wayside. It has helped nuance others, like Bagehot’s. And it guides us as to which practices to retain, reinforce and enhance, and which should be discarded.

The practice of monetary policy in the Great Moderation is another example. It informed theorising and research on Inflation Targeting. And, in turn, through trial, error and refinement, research has helped inform policy with empirical insights and workhorse models.

In the theoretical space, this process led to Woodford’s dictum that in modern central banking very little else matters beyond expectations. In contrast, the practice of central banking in a messy real world where people use various heuristics, including rational inattention, has shown the limitations of such logical extremes.

Research showed how central bank transparency and accountability make essential contributions to policy effectiveness, in a way that is complementary to ensuring central banks have democratic legitimacy. That remains an important insight in the era of enlarged and empowered central banking.Practice moved ahead of theory; theory caught up and refined practice. And the effectiveness of policy improved as a result. The crisis has meant practice has once again leapt ahead of theory. During its depths, the lessons of history and insights from psychology were arguably more valuable than precisions of dynamic programming. Our workhorse models didn’t have financial sectors; meaning questions of financial stability were not even asked, let alone answered. A great deal of improvisation was required to avoid a second Great Depression. It is vital that we draw on the experience from the crisis to rethink the way we understand the economy, the financial system, and the institutions we supervise.

To do so, we need not only to study recent history more deeply but also to apply formal methods to refine our depictions of economic dynamics, as well as the policy tools we have to shape those dynamics in socially desirable ways. We need to catalyse thinking on new approaches towards policies that have assumed greater importance since the crisis from macroprudential policy to bank resolution.

At the Bank of England, our enhanced research function, including a new Research Hub, will bring together staff and thinking from across the institution creating a two-way flow between research and policy. It will seek to foster a shared understanding of the frontier of policy possibilities amongst colleagues and ensure that the insights gained in one policy arena can benefit others. But these efforts will not succeed if they are confined to the corridors of Threadneedle and Moorgate. The Bank recognises that we need to do more to reach out to the wider research community.

Policymaking can benefit tremendously from advances in all fields of economics and finance; from psychology to epidemiology; from computer science to law. That is why I am pleased to see such a diverse range of discussants and attendees at the conference today. In order to focus the conversations we are being clear about the key questions that interest us, as policymakers, the most. Let me now turn to those. Our One Bank Research Agenda is structured around five themes which span all aspects of central banking. The themes are broad. That reflects the diversity of our agenda. They focus on the interactions and intersections between policy areas. They emphasise new challenges and new directions, while recognising that familiar questions facing central banks remain no less important. Today’s conference is organised around them.

The first theme covers ‘policy frameworks and interactions’.
The re-emergence of macroprudential instruments as part of the policy armoury raises fundamental questions about the interaction of monetary policy, macroprudential policy, and microprudential policy. It is essential to improve our understanding of the relationship between credit cycles and systemic risks. Since credit market developments both affect and reflect potential growth in the broader economy, they – and macroprudential measures to influence them – require careful study by financial and monetary policymakers alike. The advent of a new, enhanced policy toolkit raises vital questions about the effectiveness of individual policy tools; their joint operation; and how they interact domestically and across borders.

The second theme covers ‘evaluating regulation, resolution, and market structures’.
The financial crisis precipitated a radical overhaul of the approach towards regulation, supervision and resolution. Regulatory policies have shifted from a near-exclusive focus on microprudential resilience to a more balanced emphasis on minimising systemic risk. In the whirlwind of essential change, there has been, however, relatively little assessment of the overall effect of reform on the financial system as a whole. Moreover, our understanding of the ‘system’ must extend well beyond the banking sector to encompass the whole of market-based finance. The interplay between the reform process and the changing nature of financial intermediation also raises fundamental questions about how incentives and market structures might evolve and what policy might need to do to keep up.

The third theme covers ‘Policy operationalization and implementation’.
The practice of central banking constantly underscores that implementation and communication of policy can be as important as its design.  During the crisis central banks around the world made extensive and imaginative use of their balance sheets in pursuit of their objectives. This extraordinary range of policy responses provides an unparalleled opportunity to take stock of what worked, and why. As Ben Bernanke observed “the trouble with QE is it works in practice, but it doesn’t work in theory.” Understanding better the transmission mechanisms of QE, and the extent to which they are state dependent, can provide enormous insights to its effectiveness as a policy tool specifically, as well as the formation of agents’ expectations and the functioning of financial markets more generally. Recent innovations have not been confined to new tools. As I noted previously, better communication and greater transparency has also made policy more effective. Transparency has taken centre stage as policymakers sought to restore confidence in the financial system, as they conducted and published stress test results to create more transparently resilient banks; and as they gave guidance to clarify their reaction functions. Recently, research informed the recommendations of the Warsh Review into what we could do to enhance monetary policy transparency here at the Bank of England. This research theme continues in that vein by asking what more might be done to enhance effective transparency in all areas of policy.

The fourth research theme covers ‘New data, methodologies and approaches’.
Increasing amounts of data – structured and unstructured, current and historical – are available on almost every aspect of the economy and the financial system. That holds great promise. Computing power has transformed our economies; it needs now to be harnessed to transform our understanding of them. Theoretical and methodological techniques continue to advance. In some cases that will mean measurement ahead of theory. That is one way to advance. In the short term, a black box could be better than none, and with time the patterns it reveals could prompt a greater understanding of the underlying forces. Recall that Kepler needed to uncover the empirics of planetary motion before Newton could conjure the theory of celestial mechanics. It is important to exploit developments in advanced analytics of large data sets to formulate better policy. They’ll improve our understanding of household and corporate behaviour, the macroeconomy and risks to the financial system. They need to be harnessed to enhance our forecasting and stress testing capabilities. To complement this theme, we will release historical data sets including detailed breakdowns of the Bank’s inflation expectations survey, our Agents’ company visit scores, and very long back-runs of key economic and financial variables. This is one of the ways we will look to increase the permeability of our research. We are seeking also new ways to visualise and analyse the increasingly rich information sets that are available.

The fifth and final research theme covers the ‘Response to fundamental changes’.
Fundamental technological and structural trends will have a significant bearing on economic dynamics. Although they are likely to play out over a period that is longer than the Bank’s typical policy horizon, these trends will have profound implications for central banks. They include changing demography, increasing longevity, inequality, climate change, the increasing importance of emerging economies and the development of digital currencies. By affecting a range of phenomena – from the evolution of real interest rates to risks to the financial sector to the future of money and banking itself – all of these trends have the potential to re-shape our policy challenges. We need research to set us on the front foot to face them.

Wage Growth Still Slow

The ABS released their wage price index to December quarter 2014, showing continued slow wage growth. The Private sector index rose 0.6% and the Public sector rose 0.7%. The All sectors quarterly rise was 0.6%, which marks the ninth consecutive All sectors quarterly increase between 0.6% and 0.7%.

The Private sector through the year rise to the December quarter 2014 of 2.4% was smaller than the Public sector rise of 2.7%. Through the year, All sectors rose 2.5%. The CPI is now down to 1.7%, so wages are running slightly ahead.

HourlyPayRatesDec2014
In original terms, wages rose 0.6% in the December quarter 2014 for All sectors. The Private sector rose 0.5% in the December quarter 2014, smaller than the Public sector rise of 0.7%. The All sectors through the year rise was 2.6%. The Private sector rose 2.5% and the Public sector 2.7%.

The largest quarterly rise of 0.7% was recorded by Victoria, South Australia and Western Australia. Tasmania recorded the smallest quarterly rise of 0.3%. Rises through the year ranged from 1.7% for the Australian Capital Territory, to 2.8% for Victoria and the Northern Territory.

In the Private sector, the quarterly rise for South Australia of 0.7% was the largest quarterly rise of all states and territories. The smallest quarterly rise was 0.3%, recorded for Tasmania and the Australian Capital Territory. Rises through the year in the Private sector ranged from 2.0% for Western Australia to 2.7% for Victoria, South Australia and Tasmania. Wages growth in Western Australia continued to ease in the December quarter 2014. For the fourth quarter in a row the quarterly growth was smaller than the same quarter the year before.

In the Public sector, Western Australia recorded the largest quarterly rise of 1.5%, with Tasmania recording the smallest quarterly rise of 0.2%. Western Australia and the Northern Territory both recorded the largest through the year Public sector rise of 3.5%. For the second quarter in a row, the smallest through the year rise for the Public sector was recorded by the Australian Capital Territory (1.4%). Commonwealth government employee pay changes are most evident in the wages growth reported for the Australian Capital Territory. Public sector wages growth in other states and territories is mostly driven by regularly scheduled State and Local government pay increases.

By Industry, Information media and telecommunications recorded the largest All sectors quarterly rise of 1.2%. The smallest quarterly rise for All sectors of 0.2% was recorded by Accommodation and food services.

The All sectors through the year rises for the December quarter 2014 ranged from 1.9% for Professional scientific and technical services to 3.4% for Education and training and Arts and recreation services.

In the Private sector, Information media and telecommunications recorded the largest quarterly rise of 1.3%. Public administration and safety recorded the smallest rise of 0.1%. Rises through the year in the Private sector ranged from 1.9% for Professional scientific and technical services to 3.9% for Arts and recreation services.

In the Public sector, Education and training recorded the largest quarterly rise of 1.2%. The smallest quarterly rise of 0.4% was recorded by Professional scientific and technical services and Electricity, gas, water and waste services. Rises through the year in the Public sector ranged from 3.4% for Education and training to 1.5% for Professional scientific and technical services, the equal smallest through the year rise in this industry since the commencement of the Wage Price Index.