RBA’s Philip Lowe won’t stop the party

The keeper of the nation’s monetary cellar has promised to keep topping up the proverbial financial punchbowl, says Terry McCrann.

Reserve Bank Governor Philip Lowe speaking at a House economics committee in Parliament House in Canberra on Friday. Picture: NCA NewsWire / Gary Ramage

The most important message Reserve Bank governor Philip Lowe had for investors in his first week – publicly – back for the year was the one he didn’t deliver out loud.

And what a week it was.

It kicked off with the first RBA policy meeting for the year on Tuesday, at the top of Martin Place in Sydney with its scintillating view across the harbour.

Then it was off to Canberra on the Wednesday to give his annual ‘kick-off-the-year’ speech to the mixed assorted bunch of journalists, pollies, lobbyists and other hangers-on who turn up for National Press Club lunches.

And finally it was rounded off back to – or still in – Canberra on the Friday to speak again to a more select bunch of lower house pollies of the grandly titled “House of Representatives Standing Committee on Economics”.

The RBA’s official quarterly forecasts for the local and also the global economy, and which also underpin all the thousands of words uttered by the governor and shape the RBA’s policy decisions, were also released on the Friday.

Yet in all those words uttered by the governor, you can search in vain for the message I’m detailing for you, although it was the key one he was delivering for – both share and property – investors.

Simply put: I, the keeper of the nation’s monetary cellar, promise to keep topping up (and how) the proverbial punchbowl with 150-proof monetary hooch for the rest of my (currently scheduled) term as governor.

What nobody seems to have further noticed, is that the promise raises an interesting and rather awkward question of governance.

Lowe was promising the RBA would keep pouring in the hooch until “at least 2024” and quite possibly even later. Yet his term as governor ends in September 2023.

Does it bind his successor? Can it bind his successor?

Now, true, the most likely – and most sensible – ‘successor’ is Lowe himself. Both his two immediate predecessors, Glenn Stevens and before him Ian Macfarlane, had their terms – very sensibly – extended to 10 years.

Further, whether in seven years or 10, his most likely – and again, in my judgment, most sensible – successor would be his current deputy Guy Debelle; and Debelle is clearly on board with the promise.

But even so, it is interesting that a promise from a regulator that goes longer than a full parliamentary term and indeed his own specific term is accepted, across the board, without the blink of seemingly a single eyelid.

My reference to the hooch has its origin in a quote from a former head of the US Fed – Lowe’s US counterpart, the chairman of the US Federal Reserve, with a name which can only be old-style American: William McChesney Martin.

Martin said, the one and only important job of the Fed was to snatch away the punch bowl just as the party gets going. That’s to say, to raise interest rates when the economy – and the market – was booming.

Whether ever true in practise, the Fed now operates with exactly the opposite intent; starting with the legendary (in his own mind) Alan Greenspan, continuing through his successor Ben Bernanke and seen again now with Jerome Powell.

Now, the Fed sees its core job as pouring in more and evermore potent monetary hooch anytime the party starts to flag.

All Wall St has to do is throw a tanti – what used to be a 1000-down Dow day, now it would have to more like a 3000 point drop on the Dow; or a bunch of over-greedy ‘smartest guys in the room’ like at Lehman getting busted for their greed – and out comes the Fed’s ‘monetary hooch hose’.

It’s like a very, very weird version of Ray Bradbury’s already weird dystopian novel Fahrenheit 451. By the bye, give the movie a miss.

Now, to their great credit our RBA governors have never reacted to market tanties. But they have been dragged reluctantly to respond to and now to match the Fed’s monetary hooch.

They’ve done in fear of our dollar being pushed up by money pouring in to grab what would otherwise be globally high interest rates; made more acute by our booming and utterly unique current account surpluses.

So, Lowe has committed to keeping the RBA’s official rate at effectively zero (0.1 per cent) for at least three years; keeping the 3-yeare bond yield also at that level for almost as long, and longer-dated yields very low as well.

This means keeping the core mortgage loan rate at 2 per cent – effectively free money to borrow to buy property – while also forcing investors to buy shares if they want any sort of return (with risk) compared to zero interest on bank deposits.

Plus the all-but explicit promise to “do even more” if things flag. Backed up by the even more explicit promise by big brother US Fed to keep the wolves of Wall St gorging.