RBA chief Philip Lowe won’t retreat as big guns open fire

RBA governor Philip Lowe. Picture: AAP

The global central banking community’s big guns aren’t sitting back meekly watching the bonfire sparked by the US-China trade war and rising geopolitical risks, so there is little reason to expect the Reserve Bank of Australia will stand by as the flames spread.

The European Central Bank last week cut interest rates and rolled out a new bond-buying program, with ECB president Mario Draghi saying he wanted inflation to “robustly converge” to the desired target level.

Famous for speaking fighting words in the depths of a crisis, Draghi’s actions give some insight into the kind of chatter the world’s central bank heads engaged in around the dinner table at Jackson Hole, Wyoming last month.

The trade war and the risks it poses to investment, employment and growth in the year ahead dominated the conversation.

And the mood was certainly not helped by US President ­Donald Trump asking in a tweet if the US Federal Reserve chairman Jerome Powell was an enemy of the state.

RBA governor Philip Lowe had a front-row seat to the tenser than usual gathering at Jackson Hole and will have readily absorbed the message from his peers that further interest-rate cuts are coming and will be followed by calls for government spending to do more.

Powell will be back in the spotlight this week amid high expectations the Fed will pull the trigger on another rate cut midweek.

Meanwhile, reports are filtering out of the Bank of Japan that it is growing more open to the idea of pressing down on the policy ­accelerator as fears about the global economy mount.

And, on top of that, August data released this week showed visible softness in nearly every ­aspect of the Chinese economy.

That will all be funnelling into the policy mindset of the RBA, which signalled on Tuesday it might be closer to cutting interest rates than traders are expecting.

Minutes of the RBA’s September 3 policy meeting notably lacked an earlier comment that the bank would wait for an ­“accumulation” of evidence before cutting further.

“The Reserve Bank conveyed a more cautious global and domestic outlook in its September board minutes, paving the way for a rate cut soon,” possibly as early as October, said Kaixin Owyong, an economist at National Australia Bank.

When formulating policy the RBA will always looks at the global environment first, before sifting the data locally.

Lowe has visited all major regions of the globe over the past month and will have surveyed the damage to confidence of the trade war first-hand.

Even with China and the US purportedly moving closer to high-level trade talks, confidence in the idea that it will lead to anything meaningful in the near term is shot.

For companies, the fear that lengthy investment planning can be gunned down in an instant by a presidential tweet is all too real.

All this opens the door to an RBA cut as soon as October or November, which would take the official cash rate down to a new record low of 0.75 per cent, from 1 per cent now.

The RBA is likely to keep going after that, probably making its next move in February.

But global concerns being what they are, market-watchers shouldn’t discount the potential for a cluster of cuts in the final quarter of the year.

Any sign of weakness in Thursday’s August employment data is likely to drive pricing for an October rate cut up sharply.

It was hovering around 25 per cent on Tuesday, with a November cut closer to 80 per cent.

Lowe is due to speak in the NSW country town of Armidale on September 24 and observers might wonder if there is some irony in his choosing an out of the way small-town venue to focus minds on the risks facing the global economy.

The Wall Street Journal