Australia's New Central Bank Chief Has His Work Cut Out for Him

  • Lowe faces difficult odds in matching predecessors on CPI
  • RBA ideally placed to be innovator: former MIT classmate

Philip Lowe

Photographer: Sergio Dionisio/Bloomberg

Philip Lowe, who took the helm of Australia’s central bank Sunday, has risen from a country boy in Wagga Wagga to studying at the prestigious Massachusetts Institute of Technology to heading the country’s premier economic institution.

It’s been a steady ascent for the 54-year-old. Now Lowe’s challenge as Reserve Bank of Australia governor is to match his two immediate predecessors in hitting his inflation target. He faces unprecedentedly tough odds in a world where boosting consumer prices rather than taming them is the struggle; despite debates among central bank watchers that the RBA should loosen its 2 percent to 3 percent CPI goal accord with the government, the target was maintained in an updated agreement released Monday.

“If, as expected, he enters into the same agreement as his predecessors then the incoming governor will be setting himself up for a longer period of disappointment,” Bill Evans, chief economist at Westpac Banking Corp. in Sydney, said before Monday’s announcement. “The risk with adopting too high an inflation target is that central banks are forced to exacerbate imbalances in asset markets.”

When Lowe’s predecessor-bar-one, Ian Macfarlane, took the RBA’s helm in 1996, inflation in industrialized nations and Australia was just above 2 percent. When his former boss Glenn Stevens took charge a decade later, it was 1.7 percent in Group of Seven countries and 4 percent at home. Now it’s just 0.5 percent and 1 percent. Macfarlane and Stevens completed their stints with average inflation of 2.5 percent, dead center of the target range.

Lowe could yet prove to be an innovator. Just this month he cited Bank for International Settlements research suggesting that financial imbalances could be a better guide than inflation for policy makers. The RBA’s updated accord with the government on Monday included a specific acknowledgment that financial stability considerations can be relevant to monetary policy settings.

Stephen Jen, chief of Eurizon SLJ Capital Ltd. in London and a former classmate of Lowe’s at MIT, said the RBA would be an “ideal” type of institution to pioneer a new framework for monetary policy.

“These smaller but respectable central banks can be the innovators in policy -- they can be more nimble and don’t have the burdens that larger-economy counterparts do," said Jen, a former economist at the International Monetary Fund, who agrees with the idea that financial imbalances would be a better gauge for contemporary policy than inflation.

Bubble Theory

Australia’s record-low borrowing costs of 1.5 percent, along with negative rates and bond-buying programs from Europe to Japan, mean bubbles are always in prospect.

Lowe, who joined the RBA in 1980, has been studying such imbalances for decades. As far back as the early 1990s, he was developing the notion that central banks needed to keep a close watch on asset bubbles and use policy to prick them. His ideas attracted the attention of BIS -- known as the central bankers’ bank -- and Lowe was invited to do a two-year stint there.

In 2002, he and BIS economist Claudio Borio published a paper arguing the risk of a financial meltdown greatly increased after long periods of rapid credit growth and surging asset prices. They said central banks should use interest rates to safeguard financial stability by ensuring asset-price bubbles did not get out of control.

That was a controversial theory prior to the 2008 collapse of Lehman Brothers Inc.; former Federal Reserve Chairman Alan Greenspan maintained it was solely the job of central banks to clean up the mess from a burst bubble. These days, the argument is much more widely accepted, as the global financial crisis proved not only the damaging effects of a collapse in asset prices, but also the cost and difficulty of cleaning up.

But that doesn’t suggest an answer to resolving disinflation. Australia’s CPI growth is running at the weakest pace this century, prompting the central bank to cut its benchmark rate to a record low to prevent the currency appreciating -- with Australia’s yield still higher than many other countries -- and further curbing inflation.

The RBA’s new governor will likely provide more clues about his strategy to combat low inflation on Thursday, when he appears before a Parliamentary Committee in Sydney.

Early Years

Lowe was born in the inland Australian town of Wagga Wagga, not far from the state border between New South Wales and Victoria. He gained a liking for economics from his dedicated and enthusiastic teacher, Mrs King, and decided about halfway through his final year at school he would pursue the field.

But as the eldest of five children living in a town almost 300 miles southwest of Sydney, becoming a full-time university student supported by his parents wasn’t feasible. That prompted him to look at scholarships and with the help of his parents and Mrs King, he applied for one at the RBA that would let him work and attend university part-time.

The application was successful. The RBA recognized Lowe’s potential and, after two years, offered to reverse his schedule to study full time at the University of New South Wales and work in the holidays. He would graduate with an honors degree in Economics/Econometrics.

‘Brilliant Student’

The RBA then supported Lowe’s further study for a Phd at the MIT in Boston. His professors included Olivier Blanchard, chief economist at the International Monetary Fund until a year ago, who described Lowe as a “brilliant student”, as well as the late Rudiger Dornbusch, who pioneered the theory that currencies overshoot in the short run before correcting over time.

Dornbusch would invite Lowe to attend 8 a.m. breakfast meetings at which some of his best students outlined the projects they were working on, and challenged each other’s ideas. His thesis supervisors included Nobel laureate Paul Krugman.

Lowe returned to the RBA in the early 1990s and held positions including head of the economic research and financial stability departments. He was appointed an assistant governor in 2004 and then Stevens’s deputy eight years later.

Before it's here, it's on the Bloomberg Terminal.