New RBA Governors, but little expected change: HSBC's Paul Bloxham

New RBA Governors, but little expected change: HSBC's Paul Bloxham
New RBA Governors, but little expected change: HSBC's Paul Bloxham

GEUST OBSERVER

Yesterday was Phil Lowe's first day as Governor of the Reserve Bank of Australia, having been elevated from Deputy Governor to replace Glenn Stevens, who has retired.

Given Lowe's long history at the RBA and close involvement in the board process, as Deputy Governor since 2012 and an assistant Governor since 2004, we expect that the transition from Governor Stevens to Lowe will be as smooth as could be imagined.

We do not see Lowe as any more or less hawkish or dovish than Stevens. Guy Debelle also steps up from assistant governor (financial markets) to the deputy governor role, a move that, once again, supports continuity of policymaking rather than explicit change. We expect the RBA's policy framework to remain unchanged, including the 2-3 percent flexible inflation target.

Facts

Phil Lowe starts as Governor, following Glenn Stevens' retirement. Lowe has been deputy governor since 2012 (and thus a board member) and, prior to that, an assistant governor since 2004. He started at the RBA in 1980, straight out of high school. He received a PhD in economics at MIT (completed in 1991) and has seconded to the Bank of International Settlements (BIS) from 2000 to 2002.

Guy Debelle becomes Deputy Governor, following nine years as assistant governor for financial markets. Debelle started at the RBA in 1994, from the Australian Treasury and completed a PhD in economics from MIT, under Stanley Fischer (current Federal Reserve Deputy chair) and Rudi Dornbusch, and has seconded to the IMF, MIT and the BIS. 

Implications

In appointing Deputy Governor Phil Lowe to the Governorship, the Treasurer has chosen to maintain significant continuity in the operations of the Reserve Bank of Australia. In this way, it is a strong endorsement of the operations of the Reserve Bank by the current government. Likewise, the promotion of assistant governor, Guy Debelle, to the Deputy Governor role supports continuity of policymaking. The appointments support the continued operation of the RBA as an independent central bank with a flexible inflation target.

Although some observers point out that Phil Lowe's speeches have tended to be more hawkish than those of Glenn Stevens, we doubt that Lowe will be more hawkish than Stevens in policymaking (as we have pointed out recently, see 'The RBA Observer: On hold, at Governor Steven's last meeting', 2 September 2016).

In our view, Stevens' speeches also tended to be more hawkish when he was an assistant and deputy governor, but became somewhat more balanced when he took the governorship. It is also worth keeping in mind that the RBA have been 'reluctant cutters' all through the recent easing phase, being successively forced to cut by lower than expected inflation rates. We expect this reluctance to continue under Governor Lowe. 

Much like Stevens, a great deal of Lowe's economic research has been in the area of asset prices, financial cycles and their importance for monetary policy settings. Much of this research significantly pre-dated the global financial crisis.

Lowe and Christopher Kent (a current assistant governor) wrote a paper in 1997 suggesting that 'when an asset price bubble emerges, there may be circumstances where policy should be tightened in order to bring on the collapse of the bubble before it becomes too large'. Lowe went on to write papers at the BIS, in 2000-2002, that focused on the importance of financial cycles in monetary policy settings.

This emphasis on the importance of credit cycles is likely to inform Lowe's policy approach, but he has also always emphasised that it needs to be (and can be) consistent with the flexible inflation-targeting framework.

With a new governor, a new agreement will be signed between the Governor and the Treasurer. This is how the Reserve Bank Act is operationalised and is likely to be signed and published soon. We expect it to be very similar to the previous agreement, particularly stating that the RBA has the 'objective of keeping consumer price inflation between 2 and 3 percent, on average, over the cycle'.

We doubt the inflation target will be changed and strongly believe this would be the wrong move (see 'Lowering Australia's inflation target would be a mistake', 12 May 2016).

We expect the agreement to continue to include an explicit role for the RBA in maintaining financial stability. There could be some changes to the wording of this part of the agreement, in light of the RBA's more explicit concerns about lending standards during the recent housing price boom. However, we do not expect this to change the way prudential policy is implemented or the role of the prudential regulator.

Phil Lowe's first policy recommendation will be the board meeting on 4 October. We see the RBA keeping its cash rate firmly on hold at 1.50 percent at this meeting. Our central case has the RBA on hold in coming quarters. 

PAUL BLOXHAM IS CHIEF ECONOMIST (AUSTRALIA AND NEW ZEALAND) FOR HSBC. 

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