Reserve Bank governor Philip Lowe navigates uncharted waters on interest rates – The Australian Financial Review

Yet on Wednesday he was forced to admit what some financial market economists have been saying for months: the RBA may have to resort to cutting interest rates from a record low 1.5 per cent – not necessarily soon, but at some point if his optimistic plan for the economy doesn’t play out.

The RBA may be cornered. Rates are already low. Lowe doesn’t really want to go lower, barring emergency rate cuts.

Warren Hogan, economics professor at UTS Business School, says the RBA cut rates too low to 1.5 per cent in 2016 and helped fuel a housing price boom, but the bank has been unable to raise rates for the past 12 to 18 months due to falling house prices even though employment and the economy were strong.

In fact, Hogan argues the RBA’s 2 to 3 per cent inflation target, set up in the higher-inflation 1990s, is too high and outdated in the modern global economy.

“What we now know is their inflation target is probably wrong and the RBA got caught on that,” he says.

Inflation lower worldwide

Competition from technology and prices that adjust faster due to more transparent online pricing, means inflation is structurally lower around the world today.


The globalisation of the labour market and the fear of robots or foreign labour replacing local workers, as Lowe has spoken of, may also be restraining wages and prices.

Hogan advocates for a price stability target of 1 to 2 per cent inflation, even allowing for Australia being more exposed to price volatility than many countries due to being a commodity exporter.

“But you couldn’t hike now with the property market doing what it has,” he says.

Former RBA board member Warwick McKibbin has called for the RBA to adopt nominal-GDP targeting, instead of inflation.

But he too has said the RBA erred in cutting rates twice in 2016 but has since missed the boat on moving rates higher.

The RBA would argue that if rates had been higher, unemployment would be higher and growth softer.


To be sure, Lowe would be very reluctant to cut rates below the current record-low 1.5 per cent.

But after 31 months of monetary policy inaction, a rate cut is virtually a 50:50 proposition compared with a rate rise, at least in the eyes of the central bank.

Financial markets expect a rate cut in the next 12 months.

Battling with booms

For most of this decade since the financial crisis, the RBA has been captive to international events and the great monetary policy easing cycle since the 2008 global financial crisis.

The RBA navigated the mining boom, tightening rates to as high as 7.25 per cent in mid-2008, on concerns the economy’s massive terms of trade boom from roaring iron ore and coal prices could cause an inflation break out.

It won praise for cutting rates a whopping 4.25 percentage points in late 2008 and early 2009 to ward of the global crisis.


The local economy’s strength, a resilient banking system, the Rudd government’s big fiscal stimulus and China’s stimulus during the financial crisis allowed the bank to avoid following other central banks into printing money.

More recently the RBA has contended with the Sydney and Melbourne house price booms from 2012 to 2017, leaning on the prudential regulator to tighten lending standards to avoid opting for a rate increase to slow surging asset prices.

On Wednesday, the RBA’s dovish shift to a neutral stance was partly enabled by US Federal Reserve chair Jay Powell signalling his rate tightening cycle was on hold.

Canada’s central bank has also halted its rate hikes.

Economist John Edwards, who left the RBA board in mid-2016, says his view is the RBA will “not cut interest rates”, betting on the US-China trade war ending and the US economic expansion continuing.

“I still think the next move is up, but I would have to concede it probably won’t be in 2019,” Edwards says.

Quantity of credit problem

In any event it isn’t clear that lower interest rates would do much to help the economy.


Rates are already very low, so an easing is unlikely to encourage much more borrowing or spending.

House prices are falling partly because of tighter credit conditions imposed by the banks following a crackdown by financial regulators.

If anything, the quantity of credit is more of a problem, not the price of credit.

Business borrowing is much more linked to confidence in the economy and access to credit for small firms.

Lower rates will do very little.

Grant Samuel Fund Management adviser Stephen Miller says monetary policy is “pushing on a string”.

“We’ve probably done all we can with monetary policy, so if we think a stimulus is needed in the future, it should fall to a well-designed fiscal response targeting consumers through income tax cuts or cash payments,” Miller says.

Indeed, Lowe backed the personal income tax cuts the Coalition and Labor are promising, to help boost subdued wages and support consumer spending.

That may help cyclically in the short term, but to achieve higher sustainable wages, productivity gains from business will need to be passed on to workers through higher pay to lift inflation and boost the economy.

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