Philip Lowe set to chart new course for the Reserve Bank of Australia

Philip Lowe Reserve Bank of Australia governor economist
The Reserve Bank will deliver its decision on interest rates this coming Tuesday 5 February 2019.

By the end of this week, many more Australians will be able to identify Philip Lowe.

Those who follow financial markets will already know that Philip Lowe is the Reserve Bank Governor but by the end of this week his impact on everyday Australians will be better known as he changes course for the RBA.

That higher profile won’t be coming as a result of the release of the RBA board decision on interest rates this coming Tuesday.

Steady as she goes on rates

That announcement is already set in concrete with no change predicted to Australia’s official interest rate of 1.5%, although there could be some minor but interesting changes in the language of the announcement.

Rather, the greater exposure for Governor Lowe will come about when he delivers a speech to the National Press Club in Sydney on Wednesday, which is tipped to show a change of direction for the RBA.

We have had a preview of that sort of change and its ramifications with the US Federal Reserve’s abrupt about-face, which was announced by its chairman Jerome Powell.

US moved to “pause’’ rate rises

Powell moved from a program of hiking US interest rates and selling off government bonds to “pausing’’ on both as signs of a weakening world economy and particularly China literally gave him pause.

Mr Lowe is being pushed in a similar dovish direction, partly by the influence of China to which Australia is even more inextricably linked but also by the fact that the RBA’s rosy forecasts for the Australian economy have turned out to be too optimistic.

US decision feeds into Australia

Plus, the decision of the US Fed to pause its rate rise program directly feeds into the Australian decision, both through its effect on world interest rates which feeds into the funding costs of the Australian banks and through the effect to boost the Australian dollar due to a lesser interest rate differential between the US and Australia.

While Philip Lowe and the rest of the RBA board have been predicting that Australian interest rates would be heading up, an increasing and noisy chorus of market economists have been predicting just the opposite.

Philip Lowe Reserve Bank of Australia governor
Governor of the Reserve Bank of Australia, Philip Lowe.

Both camps can’t be right but both can be a little bit wrong and at the moment that seems to be the most likely position.

RBA needs to downgrade growth and inflation predictions

The RBA’s predictions of 3.5% GDP growth through 2018 and 2019 have now been shown to be overly optimistic by the weak numbers released for the September quarter last year.

Similarly, the inflation numbers in 2018 have been consistently below the RBA’s predictions.

What that doesn’t mean is that the RBA will cave to the pessimists and change its prediction for the next interest rate change to be an increase.

Australia’s employment numbers have remained firm and iron ore prices are rising quite quickly so it would be premature for the RBA to get spooked by the potential for a housing apocalypse which some of the most bearish market economists have been predicting.

That makes the most likely course of action for the RBA to water down its expectations for both economic growth and headline inflation through 2019 and to retain its opinion that the next interest rate change will still be a rise but the timing might be pushed further into the future.

Could the RBA mimic the “pause”?

Of course, anything is possible and the RBA could mimic the US “pause” or even predict an interest rate cut, although I think the cut option is still highly unlikely.

In one sense it has already been in pause mode, with rates staying steady since August 2016, despite the consistent message that they are on the way up eventually.

As for the rest of Governor Lowe’s speech, we will have to wait on tenterhooks and see what it contains but it wouldn’t surprise if he had something to say about the recommendations of the Hayne Royal Commission or the state of the sliding housing market in Australia.

Other possibilities include the ongoing trade negotiation between the US and China and the related weakness in Chinese growth figures which led to the share market ructions in late 2018 that have been to some extent overcome by January’s rapid recovery in the US.

None of these topics would be a surprise but that is all speculation, which is what markets feed on until the reality lands.

As the old saying goes, buy the rumour and sell the fact so there will be plenty of that happening until Governor Lowe takes the podium on Wednesday.

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