RBA’s Philip Lowe relaxed and ready for a fight

Reserve Bank Governor Philip Lowe. Picture: Gary Ramage

The Reserve Bank of Australia is showing no signs that it will blink first after having successfully stared down bond traders who drove up yields on government debt over the last week.

After a week during which government bond yields rose and the RBA move to sharply ramp up bond purchases in response, Governor Philip Lowe on Tuesday calmly restated his already well-articulated stance, quietly reminding markets that the central bank has the bond-buying weaponry needed to crush further resistance if it arises.

“The Bank is prepared to make further adjustments to its [bond] purchases in response to market conditions … the Bank is prepared to do more [quantitative easing] if that is necessary,” Dr Lowe said in a statement after Tuesday’s policy meeting

Though the RBA isn’t backing down from its view that interest rates will stay low until 2024 at the earliest, it isn’t Dr Lowe’s style to use fighting words to press his point.

In fact, he would want to avoid any sense that there is an epic battle being fought between the RBA and markets. He much prefers to use calm logic and will likely expand on his central arguments in a speech to businesses next week.

To be sure, Dr Lowe appeared relaxed. The keen cyclist and swimmer, who has a noteworthy golf handicap of around 15, will likely move to sweep aside notions now bubbling up in markets that the RBA is on track to raise interest rates next year given the pace of recovery in the Australian economy, rather than stay the course for 2024.

The RBA’s cautious outlook is rooted in continually weak wage growth and the idea that it may take many years before the job market is tight enough to fan wage growth that is sufficient to get inflation sustainably back within the RBA’s 2-3 per cent target range.

For inflation to return to that target and remain there, unemployment has to drop below 5 per cent for a sustained amount of time. Wages need to be growing at more than 3 per cent in this scenario, more than twice the current level.

Dr Lowe is also dogged by the idea that even when some major states have come close to full employment in recent history, a big bump in wage growth failed to follow.

In short, it is going to be incredibly difficult to get wages to the levels that might in any way drive up inflation, even as the economy rebounds.

The rapid pace of recovery in the job market over recent months has driven down unemployment, but the road back to under 5 per cent will be a long one, as it will take time for older, less-skilled workers to find employment.

Given this, it isn’t likely that the RBA’s fundamental stance on monetary policy outlook has been moved one iota by the recent skirmishing with bond markets.

Elsewhere, house prices have begun to roar again, but so far there doesn’t seem to be much hint that mortgage lending standards have become ragged. In any case, it isn’t the RBA’s job to step in to stop house prices rising.

If some response to that is needed, it will come from the banking regulator first. Tightening criteria for things like investment loans, and setting the bar higher just to get a home loan has been used with great success before.

So Dr Lowe is unlikely to be too concerned by the housing market just yet, staying true to his usual relaxed form.