Via Kieran Davies, Chief Macro Strategist, Coolabah Capital Investments:
RBA Governor Lowe delivered a very important speech yesterday on “The recovery, investment and monetary policy” at the AFR’s business review conference. Arguably the biggest take-aways from the speech were:
- The RBA has materially revised down its estimate of the fully-employed jobless rate – proxied by the non-accelerating inflation rate of unemployment or NAIRU – down from around 4.5% to the low 4s, with Governor Lowe stating it could be in the 3s (Coolabah’s CIO, Christopher Joye, argued the NAIRU might be in the 3s in the AFR last weekend as did the AFR’s economics editor John Kehoe a few days later);
- The RBA doubled down on yield curve control, dismissing economist and market forecasts that they will drop it this year, and strongly rejecting market pricing of rate hikes commencing later next year as Lowe argued rates are likely to remain near zero until at least 2024;
- The RBA has again clearly signalled that a third round of QE, or QE3, will come after the second $100bn QE2 tranche expires in September, in line with Coolabah’s long-held forecasts, and further communicated its willingness to temporarily increase QE if required to smooth market disruptions; and
- The RBA reiterated that it is singularly focused on getting the jobless rate down to the NAIRU, which is in the low 4s and possibly in the 3s, to lift record-low wages growth of 1.4% to over 3% to finally return core inflation to the RBA’s 2-3% target band. This key driver of RBA policy is something that Coolabah has repeatedly stressed in its advice to clients, with history suggesting it will take considerable time and substantial monetary stimulus to achieve this goal.
