RBA’s Philip Lowe details tricky path on rates

Reserve Bank governor Philip Lowe has laid out very precisely what he and his board plan to do about interest rates.

Reserve Bank governor Philip Lowe has laid out very precisely what he and his board plan to do about interest rates.

No, he did not say “25 points next month and the month after”, then “a break at the last meeting in December so as not to be the absolute Grinch, and again at the first meeting back, in February, so as not to cruel the autumn auction season”. Or some such.

No, he wasn’t – speaking at the Anika lunch launched by his predecessor, Glenn Stevens – that precise. He was never going to be and never could be.

Although, as I wrote after Tuesday’s 50-point hike, he again came close, very close, to ‘suggesting’ there’d be only a 25-point hike at the next meeting in October.

As I explained, there has to be some sort of hike, absent the world going over the cliff over the next month.

Certainly, share punters saw it that way, turning what had been a strong market recovery in the pre-speech morning into one that made up all of Wednesday’s big drop and then some.

Now, apart from the lingering ‘embarrassment’ of his previously far too specific “not before ’24”, the RBA always, and I mean always, takes every decision month-to-month.

He did make that precisely clear.

It’s ludicrous to think he could even know right now what he will be doing even in November and December, far less February and March.

That’s the case, even when the RBA does have an idea – indeed right now, more than an ‘idea’ – of where it is heading in general terms. Obviously, higher.

Indeed, the very way the RBA walked back from its “not before ’24” promise, showed exactly that. In the month it became impossible not to hike – in May – it hiked.

What Lowe did was to lay out precisely what it aimed to do; what it was aiming at; and how it saw the dynamics of getting there.

He also – I suggest, inadvertently and indeed unknowingly – laid out the risks of he and the RBA ‘getting it wrong’ a second time.

It is critical to understand there could very well be both a different path for interest rates, and also for what happens to the economy, than the one the RBA thinks it will be on and can achieve.

For again, the RBA might have to ‘shock’ again, by, seemingly suddenly and punishingly, switching course. Indeed, I suggest that’s the more likely outcome. Now true, Lowe all-but conceded this, by repeating what he has said before about the (RBA’s) path being a “narrow one and clouded in uncertainty”.

It wants to get inflation back below 3 per cent; but it wants to do that while keeping the economy on – as he put it – an “even keel”.

The RBA’s forecasts show that it believes it can pull off that double: with inflation down to 3 per cent by the end of 2024 but with the jobless rate up only to 4 per cent.

And by then, unstated but implicitly, with interest rates having already been cut or about to be cut.

So, Lowe was really saying that – including all the factors impacting from overseas – the RBA would raise or not raise rates, from month-to-month and in aggregate, to keep heading for that twin target.

He calls it a narrow path; I call it a Candidean ‘best of all possible worlds’ hope.

Taking more than two years to get inflation back to 3 per cent is too slow and too dangerous. It gets worse if inflation does not fall as the RBA requires.

At some point Lowe – or his successor – might have to get much tougher; to accept that getting inflation down below 3 per cent, sustainably, requires far greater pain.

Originally published as RBA’s Philip Lowe details tricky path on rates