Daily Commentary BY THE CURVE TEAM –

RBA Governor Lowe Confirms Rates Going Nowhere

21st of June, 2018

In what was a relatively quite night in comparison to recent weeks, the highlight was RBA Governor Lowe’s appearance on a panel at an ECB central banking forum in Portugal. While talking mostly on wages, he gave a good indication on the future path of monetary policy.

The challenge the RBA faces on achieving its inflation target has at the core of Governor Lowe’s appearance in Sintra, Portugal overnight. I will outline the significance of his appearance but for anyone who has a spare 10 minutes I highly recommend you watch the full clip which you can find here.

The RBA has indicated for some time that increased wage growth will be required to lift inflation back towards the centre of their target band on a sustained basis. While the commentary around the outlook remains positive at every turn and optimistic that wage growth will soon materialise, Lowe admitted it could take much longer than expected.

The key, as Lowe delved into the RBA’s gradual approach to achieve its inflation target, is the risks posed by a faster approach. He said specifically that:

“To try to get back to 2.5 (the middle of the RBA’s inflation band) very quickly , it would be mainly through people borrowing more money, and having higher asset prices – I think that’s a much bigger risk to our economy than people having surprisingly low inflation expectations”. 

So in order to achieve its price stability mandate without inducing financial stability risks, the RBA has little choice but to take the gradual approach.

The overall tone to his speech suggests that the RBA it prepared to wait as long as it takes. He concluded with the thought that “inflation might be just a bit lower than we would like for a while”, even if that was a difficult concept for a central banker to accept.

Market pricing continues to walk back from the prospect of a 2019 rate hike with a move in November 2019 no longer fully priced. With wage growth unlikely to lift materially enough to impact inflation on the horizon, the cash rate isn’t going anywhere in a hurry.

The question now is, how long will it be until we see the rhetoric from the RBA soften to reflect such an outlook.

David Flanagan

Director - Interest Rate Markets