Phillip Lowe, the governor of the Reserve bank has been talking at a gab fest somewhere around the world. These days, whenever I read something Lowe has said, I always look for Paul Krugman’s influence on the man. It’s never that far away because Lowe did his PhD under Krugman’s tutelage. He never disappoints with his Keynesian nonsense (Lowe).
Lowe is the head of the RBA and among his many responsibilities, one is by far the most important of all. It’s the inflation mandate.
Here it is, right from the horse’s mouth, or rather, the RBA website.
The Governor and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3 per cent, on average, over time. This is a rate of inflation sufficiently low that it does not materially distort economic decisions in the community. Seeking to achieve this rate, on average, provides discipline for monetary policy decision-making, and serves as an anchor for private-sector inflation expectations.
This means that over the medium term the RBA’s responsibility is to hit that target.
What’s Lowe saying at the bag fest?
Reserve Bank of Australia governor Philip Lowe has taken his warning that governments must do more to stimulate the economy onto the global stage, arguing central banks risk reigniting bubbles in house prices and stock markets with ultra-low interest rates.
Lowe’s warning … must be important.
“Monetary policy cannot deliver medium-term growth,” he said, according to reports of his remarks by Bloomberg. “We risk just pushing up asset prices.”
The RBA recently cut Australia’s cash rate for the second time in as many months to a record low of 1 per cent in July. Many economists and analysts expect the RBA to slash the cash rate to as low as 0.5 per cent by the start of next year to combat a stagnating local economy and rising unemployment amid the global trade jitters.
Dr Lowe told the Jackson Hole conference that infrastructure investment and structural reform in economies around the world would have much greater impact than cutting interest rates.
But he warned politicians were reluctant to act.
“With these three levers stuck, the challenge we face is monetary policy is carrying too much of a burden,” Dr Lowe said.
It appears to be lost on Lowe fiscal expansion doesn’t just entail spending on infrastructure – that tax cuts, of the ones we’ve seen here both proposed and enacted are fiscal stimulus. He doesn’t appear to like that type of stimulus and remains silent.
Here’s the rub. Lowe took the job as RBA head on the presumption that he adheres to the inflation mandate. He’s now saying that it will be too hard or sees obstacles in the way. On the basis of what he’s said, the Australian government needs to fire Lowe immediately and put in place someone who both understands and believes a central bank can reach any inflation target that it chooses or is chosen on its behalf. It’s extraordinary this Krugman disciple is giving the Australian government and the world for that matter advice on engineering projects.
Lowe talks about the fear of bubbles and overheated markets. Where are they? I don’t see one major index in the world trading at what people like Lowe would consider bubble territory. Lowe is obviously referring to Australian real estate markets where here too he shows concern about a bubble. Real estate markets are impacted by several things, with interest rates being one factor. High immigration levels, restrictive code, taxes and interest rates all factor in. The US experienced a great deal of QE in the past decade and real estate markets have not taken off to reach bubble territory. Texas as an example of a state with high levels of immigration for decades and the cost of a home is way below Australia or California for that matter. In fact, there have been no apparent bubbles forming in either the EU countries or Japan which went in reasonably hard with QE.
The problem around the world is the market participants do not believe central banks will reach their targeted inflation mandates and therefore investment decisions are acted on accordingly. Bond yields are falling because of this.
Fire Phillip Lowe and fire him immediately as he doesn’t believe in keeping the most important mandate set by law. It about time public servants were held to a reasonable standard.