OPINION: RBA’s Lowe and Debelle: One Slightly Dovish, Other Tad Hawkish
- Published on
- 14 Feb 2020, 04:45 PM
By Sophia Rodrigues
We all know the Reserve Bank of Australia has a very weak dovish bias and is reluctant to lower the cash rate further.
But do we know if all members of the monetary policy board share the same view?
This time though we have some insight. It appears the Governor Philip Lowe and his Deputy Guy Debelle are on slightly different page.
They both agreed for the cash rate to be held at 0.75% at the last board meeting but their key reason for doing so was different.
Lowe is focused on medium-term macrostability and is worried about the medium-term risks to the economy if interest rates are lowered further.
Debelle, on the other hand, thinks that after the RBA’s three rate cuts last year, there is an upside risk to its latest forecasts on growth and inflation.
While the difference may not be huge, the fact that they hold the top two positions at the RBA means it could have an impact on future monetary policy decisions.
Right now, Debelle appears more hawkish than Lowe because he is talking about upside risks to forecast. So, in his mind Debelle might have a hold for longer view on the cash rate.
Lowe, on the other hand, is still talking about the possibility of further cut in the cash rate if he is convinced that the risks outweigh the benefits.
LOWE’S FOCUS IS “BALANCE”
In February, the RBA board considered the balance between the benefit of lower interest rates and the risks associated with having interest rates at very low levels, and decided the cash rate needed to be left on hold to strike the right balance. The RBA also considered the long and variable lags in the transmission of monetary policy.
The “balance” however is a moving part and can change over time because it is highly dependent upon the state of the economy.
If that balance changes, Lowe is prepared to lower the cash rate.
“If the unemployment rate were to be moving materially in the wrong direction and there was no further progress being made towards the inflation target, the balance of the arguments would tilt towards a further easing of monetary policy,” Lowe said at the Parliamentary testimony last week.
DEBELLE’S FOCUS IS SPILLOVER OF HOUSING REBOUND
For Debelle, the debt or the balance angle – more specifically rising debt caused by low interest rates – is secondary to the monetary policy decision.
His main argument is that the impact of the three rate cuts last year are only “barely” beginning to show. And because of this, there is upside risks to the RBA’s recent forecasts.
Debelle’s view is mainly based on how the spillover of the housing downturn both in prices and construction to the real economy and to inflation was considerably larger than he personally expected.
Because the spillover during downturn was worse than expected, Debelle thinks there is a “reasonable” chance of an upside risk during the upturn.
“And I think just as we may have made under-forecasts of growth and inflation because of the downswing in the housing cycle, I personally think there's a reasonable chance that the error will be on the upside. And I suppose in my risk assessment calculus I would put a reasonable weight on that over the period.” Debelle said at the Parliamentary testimony.
Debelle also made an interesting comment. “When the facts change, I can change my mind.” So, if things move opposite to his expectation, it is possible Debelle might change his mind from a view of on-hold cash rate to a cut. All it requires is for housing rebound to not have as much as spillover to the economy as the downturn did.
--Contact: sophia@centralbankintel.com