September baton change for the RBA

The Federal Treasurer Scott Morrison recently announced Dr Philip Lowe as the new RBA governor to replace Glenn Stevens, who has been head of Australia’s central bank for the past decade.

Dr Lowe will start his seven-year term in September this year at a time when the cash rate sits at a record-low 1.75 percent.

He has been RBA deputy governor for the past four years under Stevens, and had been long tipped in financial circles as the next governor. 

He first joined the RBA in 1980, the same year as Glenn Stevens, well before financial deregulation provided a platform for lucrative, glamourous careers for economists in the financial markets.

Back then the Reserve hired school graduates and supported them as part-time students. Lowe's first job at the Reserve was doing clerical work while attending night classes at the University of NSW.

Dr Lowe is well regarded in the central banking community, financial markets, and the Australian business community, and news of his appointment has not upset confidence in the institution.

We know about the monthly RBA meeting, but every morning, reportedly at precisely 8.50am, Stevens and Lowe along with three of the bank's assistant governors, meet to discuss the major issues of the day.

Sometimes the meetings only last five minutes, but can stretch out to 45 minutes.

Dr Lowe earned a PhD in Economics from the Massachusetts Institute of Technology after being awarded the University Medal for his undergraduate studies in economics at the University of New South Wales. He completed a doctorate at MIT in 1991, under the supervision of Nobel prize-winning economist Paul Krugman.

His appointment comes at a crucial time when central banks around the world are all wondering just what stimulus levers they actually have available in their management of their economies.

When Dr Lowe served as Head of the Financial Institutions and Infrastructure Division at the Bank for International Settlements (2000 – 2002), he authored important research on the financial stability role of central banks in low-inflation environments.

Something that afflicts the world currently, with one wise observer suggesting to me recently "we are all swimming in flat lemonade."

Lowe made his mark in a paper co-written with BIS economist Claudio Borio when he argued that even when inflation was tame, central banks should be wary of allowing low interest rates to fuel asset-price booms.

It was a then controversial view as in the US, the prevailing wisdom of the then-chairman of the Federal Reserve, Alan Greenspan, was that price booms were not the main concern of central banks. 

Lowe has a nice record back here of offering frank assessments on the challenges Australia faces.

He was especially vocal about lax lending standards in Australian banks during the property boom after inquiries on mortgage lending led to banks revising upward their total level of investor lending by some $50 billion.

Lowe has said we have got overly used to consumption growing more quickly than income.

He said we had gotten used to asset prices, credit and fiscal revenues growing more quickly than income.

We had got used to employment increasing more rapidly than the working-age population.

And we had got used to growth in our real incomes outpacing the rate at which we were improving our productivity.

One can hardly wait to glean what he thinks about the current, often reckless, search for yield by investors across all asset classes.