There is a reason why you are seeing a lot of the Reserve Bank Governor Dr Philip Lowe recently.
He has reached for the megaphone – making his first speaking visit to the Canberra Press Club – to assure Australians that he won’t be raising interest rates until well into the future – 2024 at the earliest.
Not only that, he has grabbed a second $100 billion to buy more government bonds to guarantee that rates will stay as flat as possible.
All of which might seem to be a bit of overkill when Australia is doing well in the fight against COVID-19 and the economy looks like it will be very healthy this year – as long as the pandemic is kept at bay.
Overkill required due to uncertain outlook
The reason for his extreme caution is two-fold – he is obviously concerned that accepted wisdom will begin to be that a stronger economy will force rates higher in the short term and he has also realised that Australia’s Federal Government is determined to rein in the purse strings and go back to stressing about debt and budget deficit levels.
That is a very dangerous time to be a central banker when the government winds back all of its stimulus spending after a sharp but brief recession and starts pulling in the opposite direction, having an eye to the next election and the need to have some cash in the cookie jar to make some promises.
RBA wants to make sure party really gets going
While the main perceived job of a central bank is to take away the punch bowl as soon as the party gets going, the other side of that is to keep the punch bowl on the table until you are absolutely certain that the party has worked up enough momentum to be self-sustaining.
Dr Lowe obviously is not yet sure of that – wary that the end of the government stimulus payments could see economic activity wane once more and Australians revert to savings mode and stop spending.
The international outlook is also troubling with large chunks of the world such as Europe and the US still in dire economic straits battling the pandemic with vaccines only making tentative inroads and the small matter of our largest trading partner China progressively banning our export industries one by one.
Inflation in Australia remains troublingly low and Dr Lowe will need to pull out all stops to get it back into the bank’s 2-3% range and for employment and wages to really kick higher.
Living standards falling as wages remain static
With wages growth still static, living standards for lower and middle-class households will resume falling. This will happen while wealthy households get a boost as low rates push house and other asset prices ever higher.
The one thing you don’t want on your resume as a central banker is that you presided over an avoidable recession and didn’t do enough to keep the economy ticking over.
To that end, Dr Lowe must have been concerned to hear Australian Prime Minister Scott Morrison talking about exercising “fiscal discipline’’ so that massive debts weren’t left for future generations.
Dr Lowe has repeatedly urged the Federal Government to spend up on infrastructure and run up debt to do it so he must have been disheartened to hear Mr Morrison promise to stabilise and reduce debt and say that he would not be running a blank cheque budget.
If Morrison won’t spend, the RBA will
Well, if the Federal Government won’t keep up the spending then the RBA will, with the announcement that it will set aside a second $100 billion to buy up government bonds a massive one.
It may not seem like it to the average person but that is an enormous amount of stimulus from the RBA – equal to almost a third of GDP – and it will allow state governments to finance any infrastructure projects with no problems.
The other lever the RBA wants to pull is to encourage business to invest – something they were not doing well before the pandemic urged an even more cautious approach.
Low rates push business to invest
Dr Lowe will be hoping that some animal spirits return to the business sector and they should, as long as business can be confident it can produce many multiples of its borrowing costs by expanding or buying other businesses.
One of the benefits of low interest rates inflating asset prices is that it allows businesses to issue shares at high prices to pay for takeover and other growth plans, so having some certainty that rates will stay low for the conceivable future is a real help for planning investment.
Of course, while Dr Lowe might be frustrated that the Morrison government has returned to its penny-pinching ways after a brief interlude of spending like a drunken sailor on income support schemes, there is nothing in the central bank playbook that prevents a change of mind there to cover “different’’ circumstances.
RBA could change its mind but would take something extraordinary
Should the Australian economy really build up a head of steam quickly or the bubbly housing market should go even further into overdrive, there is nothing to stop the RBA from having a change of mind and picking up the punchbowl to leave.
It would obviously take something really extraordinary for the RBA to change its outlook and begin to raise rates before 2024 but just as we have seen how determined Dr Lowe is to print money to keep the economy moving, he would be just as determined not to keep rates too low for too long should inflation and the economy really take off.
Just how extraordinary is shown by the RBA’s fairly rosy “central scenario” which is for GDP to grow by 3.5% over this year and next and that unemployment will be “around” 5.5% at the end of 2022.
Most private economists have pencilled in more anaemic growth and higher unemployment than that but if the unlikely does happen and Australia somehow takes off like a short squeeze stock, Dr Lowe will have one hand on the punch bowl and start heading for the door.