Lowe’s ‘forward guidance’ changes the game

Reserve Bank of Australia governor Philip Lowe may have steered the country’s monetary policy into unorthodox waters.

RBA governor Philip Lowe addresses the Anika Foundation Luncheon in Sydney yesterday. Picture: Adam Yip

Reserve Bank governor Philip Lowe may have steered the ­country’s monetary policy into unorthodox waters, giving every impression yesterday of offering explicit forward policy guidance to markets that interest rates will remain low for a lot longer.

In a speech where he ruled out abandoning the RBA’s long-held 2-3 per cent inflation target, Mr Lowe also told markets that ­interest rate increases weren’t even on the central bank’s policy horizon.

“It is reasonable to expect an extended period of low interest rates. On current projections, it will be some time before inflation is comfortably back within the 2-3 per cent target range,” Mr Lowe said. “It is highly unlikely that we will be contemplating higher interest rates until we are confident that inflation will return to around the midpoint of the target range.”

Mr Lowe later downplayed the comments, saying they were just an act of policy transparency, something he is always keen to do.

“I wouldn’t describe this as a shift in approach to a kind of explicit forward guidance. It’s just consistent with this view that I’ve long had that we need to be as transparent as we can,” he said.

But economists and markets are reading more into it. “This looks like explicit conditional forward guidance to us … regardless of how it is termed, we see it as a device aimed at flattening the yield curve,” said David Plank, head of Australian economics at ANZ.

The intention was also to weaken the Australian dollar, something that would help lift the economy. Official interest rates were cut last month and again this month, the first reductions since 2016, taking the cash rate down to a record low 1 per cent, leaving policymakers with scant conventional firepower to fight off future economic shocks. There has been a lively debate over how the RBA might enter the waters of unorthodox policy should interest rates be forced even lower. Explicit forward guidance, where a central bank indicates it will keep interest rates low for longer in order to boost confidence, was widely viewed as a likely first move. The RBA indicated recently that any steps toward embracing full blown quantitative easing were still far off.

Tapas Strickland, a market strategist at National Australia Bank, said he classified Mr Lowe’s comments as pseudo-forward guidance, in that they merely laid out how the current inflation framework should operate.

Still, the comments had the effect of pushing the Australian dollar lower in Asia trading.

Stephen Halmarick, global head of economic research at the Commonwealth Bank, said Mr Lowe delivered a two-pronged message for the markets by offering forward guidance while also keeping further interest rate cuts on the table.

“If demand growth is not sufficient, the board is prepared to provide additional support by easing monetary policy further,” Mr Lowe said.

It could take until 2021 before inflation was back at the midpoint of the RBA’s inflation target band, Mr Halmarick said.