Reserve Bank Governor Phil Lowe, has made it clear that what foreign central banks did with their monetary policy settings didn’t drive the Reserve Bank and force it to follow.
In a speech in Sydney yesterday (http://www.rba.gov.au/speeches/2017/sp-gov-2017-07-26.html) where he made it clear that there was a large gulf between the situation in developed economies outside Australia and the state of the Australian economy and its outlook.
His speech came after the June quarter Consumer Price Index showed a larger than expected fall to a reading of 0.2% and an annual rate of 1.9% – 1.8% for the RBA’s core measures) Dr Lowe opened up on those ‘hawks’ in the markets and the business media who believed Australia should look to follow offshore central banks which were starting to tighten monetary policy – and he set them right
"Elsewhere in the world, some central banks are now starting to increase interest rates and others are considering when to withdraw some of the monetary stimulus that has been put in place. This has no automatic implications for monetary policy in Australia.
"These central banks lowered their interest rates to zero and also expanded their balance sheets greatly. We did not go down this route. Just as we did not move in lockstep with other central banks when the monetary stimulus was being delivered, we don’t need to move in lockstep as some of this stimulus is removed.”
It was a point his deputy, Guy Debelle made in a speech in Adelaide last Friday (http://www.rba.gov.au/speeches/2017/sp-dg-2017-07-21.html):
"Just as the policy rate in Australia did not need to decline to the very low levels seen in other parts of the world, the fact that other central banks increase their policy rates does not automatically mean that the policy rate here needs to increase. The policy rates in both the US and Canada still remain below that in Australia. Ultimately, in Australia as is the case elsewhere, policy rates are set at the level assessed to be appropriate to achieve the domestic policy objectives.”
Dr Lowe was speaking on a topic of “The Labour Market and Monetary Policy” and Dr Debelle was addressing the topic “Global Influences on MonetaryPolicy. Their speeches would have still addressed these topics but were given greater currency by the outbreak on nonsense in the past month from some commentators and economists here and overseas which suggested that, because some foreign banks were starting to tighten monetary policy, the RBA should follow by changing its policy stance to one that can be best summarised by the childish headline so beloved of some in the media ‘Rate Rise Looms.”
This belief got a big push when European analysts misread comments by Mario Draghi, the head of the European Central Bank who remarked in a speech in Portugal that deflation had ended in Europe – a comment many analysts and investors took to mean the ECB would start throttling back on its quantitative easing (reducing the size of its balance sheet) – just at a time when the US Federal Reserve is pushing up rates and thinking about the time to start shrinking its huge balance sheet. The Bank of Japan though is showing no signs of following. But that was immaterial so bonds sold off, yield jumped sharply, including in Australia, and the value of the Aussie dollar rose, topping 80 US cents briefly last week.
That was after the release of the minutes of the July board meeting of the bank which featured a lengthy discussion of the neutral real interest rate for Australia which was estimated to be around 3.5% (that’s where the key rate is neither accommodative or contractionary). That saw many in the markets completely misread what the RBA was saying – that it was softening up markets for the start of a stream of rate rises to ’normalise’ monetary policy.
It was a discussion of the measure and the idea, not a policy assessment a hint – a point that started appearing in reports in the business media late last week. Dr Lowe said in his speech yesterday:
"We have not sought to stimulate a rapid lift in inflation. The fact that the labour market has been generating sufficient jobs to keep the unemployment rate broadly steady has allowed us to be patient. Our judgement has been that seeking a more rapid pick-up in inflation through yet further monetary stimulus was likely to add to the medium-term risks. Our central scenario remains for underlying inflation to pick up gradually as the economy strengthens.
"Our decisions will continue to be made within the framework of our medium-term inflation target. We are intent on delivering Australians an average rate of inflation over time of between 2 and 3 per cent. We are seeking to do this in a way that supports sustainable growth in the economy and that best serves the public interest. To do this we need to understand developments in Australia’s labour market and to take account of our decisions on balance sheets in the economy.”
A combination of the speech and Dr Lowe’s comments pushed the dollar down to 79 cents in Australian trading yesterday, but there are still quite a few people who think rates are going to rise.
These analysts and commentators still don’t accept that inflation has been falling for most of this year in the US, Europe, Japan, NZ, UK and Australia. If this continues for a few months the same narks in the markets and media who were hawks will start talking up ‘Rate Cut Looms” as disinflation takes hold.
