RBA likely to press pause as Lowe’s reign nears its end

For the third month in a row the Reserve Bank board will again be asked to choose between hiking by 25 points or pausing.

A pause would then let RBA Governor Philip Lowe see the more in-depth quarterly inflation data for the June quarter, released at the end of the month. Picture: NCA NewsWire / Gary Ramage

Two options will be on the table at what will almost certainly be Philip Lowe’s third-last meeting as governor of the Reserve Bank on Tuesday morning.

For the third month in a row, the board will again be asked to choose between hiking by 25 points or pausing.

This month, with Lowe – supported by his deputy Michele Bullock – likely signalling a preference for a pause, that’s all-but certain what we will get.

This choice – hiking by 25 or pausing – was also on the table at the previous two meetings, in May and June.

But at those meetings, Lowe, and Bullock, led the board to opt for hikes.

It was only at that earlier May meeting that Lowe adopted this practice of providing the outside directors with detailed arguments for two policy choices.

Previously, in all the meetings going back to the 1990s – with only the odd exception in extraordinary circumstances – the governor gave the board only one policy choice, to accept or reject.

And in that time and over 300 meetings a governor had never been directly overruled by his board.

The core argument for a pause is that inflation has fallen significantly since December, including the latest – partial – monthly number.

There are also signs – not yet showing up in key official statistics, like retail sales and the jobless numbers – of the economy slowing, perhaps sharply.

Michele Bullock, deputy governor of the RBA. Picture: John Feder/The Australian.

A pause would then let the RBA see the more in-depth quarterly inflation data for the June quarter, released at the end of the month and ahead of the August meeting.

That though also points to the main argument for yet another hike.

Inflation might be falling, but is still both too-high over 5 per cent; and is looking increasingly sticky at that level or potentially even higher.

There are a host of price rises from July 1, led of course most obviously and most dangerously, by electricity.

Further, our official interest rate at 4.1 per cent is both lower than current and expected inflation rate; and also the rates of other central banks.

The Fed, the Bank of England and even our sister Reserve Bank in New Zealand, all have their rates above 5 per cent.

Now, the likely pause would also give the lie to claims that Lowe wants to put in place further hikes ahead of his likely departure after the September meeting.

But it is certainly true – and should be more than a little troubling – that all the local names being tossed around as likely successors are more dovish than the already somewhat less than hawkish Lowe.

That includes both his current deputy Bullock and his former deputy Guy Debelle, who left the RBA last year and is one name suggested for his replacement.

All the non-RBA names being mentioned, including treasury head Steven Kennedy, are regarded as more dovish.

But then, so was Paul Keating’s treasury head Bernie Fraser, who he made the first and – so far – the only governor from outside the RBA.

Fraser turned out more than a tad hawkish – and gave us near-30 years of low inflation; and as a consequence, sustained low interest rates.

Originally published as RBA likely to press pause as Lowe’s reign nears its end