Today Phil Lowe faces the most important moment of his career, the gravest moment in his central bank’s history and, to put it bluntly, the most far-reaching moment for the contemporary financial system, as well as the liberal capitalism that it represents, that any Australian central banker will ever face.
I am not kidding.
Today Phil Lowe mounts the global podium to announce Australian quantitative easing. If he gets it right, with an assertive tone and commitment to do “whatever is takes” plus deploying appropriate yield curve controls, Phil Lowe can put a big dent in the global market panic.
If he gets it wrong then he will throw petrol on a building interest rate conflagration that will consume the global economy and make fighting the virus damn near impossible as governments struggle to borrow.
Why is it so important that Phil Lowe, of all poeple, delivers? It’s partly becasue of the timing, partly because his job is so easy and partly becasue the fiscal wave is upon us.
On the first point, Phil Lowe comes on the heals of an ignomious week for central banking. Last week we saw the ECB’s new celebrity chief, Christine Lagarde, botch her opening market briefing spectacularly when she declared she was not in the business of compressing spreads. Peripheral European bond markets have been flogged ever since despite the ECB issuing reversals later. Later in week we saw the Fed move too slowly and misfire with a range of tools as the market panic grew. It has still not declared it is determined to flatten the US curve “whatever it takes” and needs to do so desperately. We’ve also seen no multilateral co-operation for fiscal and only piecemeal from central banks. Markets are literally toying with the idea of quantitative failure: that central banks are cooked.
So, up steps Phil Lowe, who has also been horribly behind the curve. He has the opportunity to turn this around, to give a clear and ringing declaration that he will protect the risk free rate of capilalism “whatever it takes”. Markets need to hear that if they take the other side of that trade then are going to be eaten by the biggest dog on the block.
This brings us to the second point that matters. Phil Lowe’s job is easy. The Australian Government debt market is tiny at a paltry $600bn. For Phil Lowe to control spreads in something so small, he probably only needs QE of $50bn and the market will do the rest. Even if he needs double, triple or quadruple that, it is next-to-nothing in the scheme of things. He could buy the entire ACGB market and his balance sheet would only be roughly 30% of GDP, the same as the Fed before it embarked on quantitaitve rundown.
In short, he can do this like squashing a bug and should do so ruthlessly to set the tone for other bond markets around the world. If he appears weak with so small a task then markets will smell blood for other jurisdictions where it is more difficult.
Which brings us to the really important point. And where Lowe needs to be both bold and careful. As a long-term champion for greater fiscal stimulus, Lowe must set the scene for that need in such a way that he does not spook markets about imminent recoveries or inflation. The global fiscal wave is going to be big. But it is not going to be anywhere near as big as the deflationary tsunami emanating from the virus. Markets need to accept the need for huge fiscal and understand that it will not be inflationary. It is economic support to bridge the virus as best we can not stimulus to overheat anything.
To achieve this, Dr Lowe will need to dispense with his customary glass half-full balderdash. He needs to be honest about how severe a test the virus represents.
No pressure, mate.
