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RBA boss Phil Lowe demonstrates his dexterity
2021-03-02 09:15:02.636 GMT

By Karen Maley
March 2 (Financial Review) — As the Australian economy
rebounds, Reserve Bank governor Philip Lowe faces a fresh
challenge: can he demonstrate the same keen judgment on
monetary policy during the recovery as he did in the dark days
of the pandemic?
The challenge came to a tumultuous head last week, as bond
market vigilantes unleashed turmoil in global fixed interest
markets, pushing up long-term borrowing costs around the world.
Bond yields, of course, have been rising as vaccines are
progressively rolled out around the world, and as global
economic activity responds to massive doses of fiscal and
monetary stimulus
The yield on benchmark US 10-year bonds, considered the
global risk-free rate, has climbed from less than 1 per cent at
the beginning of the year to a peak of 1.6 per cent last week.
(The US 10-year bond rate has since fallen back to 1.4 per
cent).
But the ferocity of last week's bond market sell-off
reflected fears that the global economic recovery will ignite
inflationary tensions, which will force central banks to hike
interest rates much sooner than they expect.
Lowe's response has been to play a steady hand. On Monday,
the Reserve Bank doubled the size of its daily bond purchases
from $2 billion to $4 billion, in order to calm some temporary
dislocations in the bond market.
And at its meeting on Tuesday, the Reserve Bank board took
the view that there was no need to boost the central bank's
existing $200 billion bond buying program, given that the bond
market ructions had now been settled.
Instead, Lowe decided that the best way to settle skittish
markets was to provide a calm and clear recitation of the
Reserve Bank's position.
In his statement after the meeting, Lowe emphasised that
the central bank was continuing its stimulative monetary policy
– including keeping the cash rate and the yield for three-year
Australian government bonds at an ultra-low 0.1 per cent.
And he reiterated his reassurance that the central bank
"will not increase the cash rate until actual inflation is
sustainably within the 2 to 3 per cent target range".
He also drew investors' attention to the fact that it is
likely to be several years before the labour market improves
enough to generate sufficiently strong wage rises for the
inflation target to be achieved.
Lowe's emphasis on patience is a salutary reminder for the
bond vigilantes who are expecting central banks to pull the
trigger on rate rises as soon as they hear the slightest rustle
from inflation.
And it's an important indicator of the profound change in
the mindset of the world's leading central bankers, who found
themselves pressing up against the effective lower bound – the
point at which monetary policy can't be loosened any further –
during the coronavirus pandemic.
Leading central bankers realise that this is not a
desirable situation, and they are determined to make sure that
inflationary pressures are robust and sustainable before they
even contemplate tightening policy.
But while Lowe's soothing words helped calm nervy bond
traders, he showed his real dexterity in leaving his options
open on how long the yield curve target will remain in place.
At present, the central bank has a yield curve target of
0.1 per cent for the April 24 Commonwealth government bond. The
big question in financial markets is whether it will extend
this same target to the November 2024 bond.
But Lowe is far too adroit a player to lock himself into
making a premature call. He knows he has several months before
he needs to make a decision.
That provides him with valuable time to assess both the
robustness of the economic recovery, and conditions in
financial markets before he makes any fine adjustments to the
central bank's suite of stimulus measures.

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Financial Review
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-0- Mar/02/2021 09:15 GMT

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