Lowe Stamps Asset-Bubble Policy on RBA After 25 Years in Waiting

  • New governor presses signature issue at parliamentary hearing
  • Lowe gives three hours of testimony in his first week on job

For a quarter-century, Philip Lowe and a small band of like-minded peers pressed the need to manage credit growth and asset prices, sometimes to incredulous colleagues. Now, as Reserve Bank of Australia’s new governor, his theory has more sway.

In his first testimony to a parliamentary committee Thursday, Lowe emphasized the signature issue he’s developed since the early 1990s, which has found a more receptive audience in the wake of the 2008 financial crisis. Sure, the RBA could probably return inflation to target faster with looser policy, Lowe acknowledged, but doing so would risk igniting a new round of borrowing among already debt-laden households.

“We have considered that a very quick return of inflation to the 2 to 3 percent range, at the cost of a material deterioration in the health of private-sector balance sheets, was unlikely to be in the public interest,” Lowe said in Sydney. Just three days earlier, he released an accord with the government that made an explicit link between monetary policy and financial stability.

Lowe bolstered his argument by making clear the inflation target was extremely flexible, pointing out that since its inception consumer-price gains have been outside the range almost half of the time -- equally divided above and below. “We have not been what some have called ‘inflation nutters,’” he said. Most important is that the community has confidence that inflation on average will be “2-point-something,” he said.

By “linking policy directly to financial stability -- read asset markets -- he has allayed much of my concern” on excessive easing, said Bill Evans, chief economist at Westpac Banking Corp. in Sydney. “Markets are likely to eventually scale back prospects for further rate cuts given these developments.”

Australia’s new chief economist is a polished communicator with an easy style borne of a country upbringing; he is an invariably polite and attentive listener. The three hours with a panel of lawmakers Thursday was no exception and provided a tour de force of the Philip Lowe world-view. This included that:

  • Workers in the western world have avoided asking for pay rises because they’re afraid in an increasingly globalized labor force that doing so might cost them their jobs;
  • Weak wage growth has helped boost employment in the industrialized world, and at some point the jobless rate will fall far enough to encourage workers to seek higher salaries;
  • Heavy debt and a poor demographic outlook don’t guarantee permanently low growth for the western world. As a “technological optimist,” Lowe believes further advancements will bring new gains in productivity and higher living standards;
  • Uncertainty and concern about Australia’s economic outlook can become a self-fulfilling prophecy, because if everyone delays investment then eventually conditions will weaken;
  • Australia has made it through the mining boom without blowing up the economy, and will make it through the current housing boom and the transition to services;
  • Australia is blessed with a growing population and vast opportunities in its region.

Lowe, in his polite and understated way, also turned the tables on the lawmakers questioning him:

When presented with a complaint that central banks worldwide were trying to do too much with policy, he pointed out that governments had departed the field. Spending on infrastructure financed by record-low rates would boost employment and productivity and economic growth, he said.

When questioned about easy monetary policy increasing inequality -- as people with assets benefit from rising prices while those without cannot afford to buy -- he noted there was plenty within the government’s purview to help create jobs, as well as conditions for the private sector to generate higher paying jobs. He also said the RBA’s low rates boosted jobs.

House Prices

Lowe agreed with complaints about high house prices in Sydney and Melbourne. But he also highlighted that the issue is about the value of land and most people wanted to live near the sea or city center, because transport infrastructure is so poor. An increase in property supply, together with investment in roads and railways, would encourage people to move further away if they could reliably access the facilities a city had to offer.

The points didn’t appear to register with the lawmakers.

But there were moments of levity. Asked whether he was a glass half-full type person like former Governor Glenn Stevens, Lowe thanked the lawmaker for the question and recognized that, yes, indeed he was one. He said that there’s no other country he would rather be central bank governor of and that he was fundamentally optimistic about Australia’s prospects.

The new governor also said the only thing Stevens left him on his desk when he departed was a coffee mug. It was emblazoned with two words: “half full.”

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