Why the RBA is about to Re-Emerge from the Shadows

First-class honours and the University Medal. A doctorate from the Massachusetts Institute of Technology (MIT) — perhaps the most prestigious institute in the US, if not the world.

If Dr Philip Lowe, Governor of the RBA, could sell off just some of his excess IQ, no doubt he would be a very rich man.

Born and raised in Wagga, the Governor got his start at the RBA as a teenager…not even old enough to vote.

Working as a clerk in the day, he studied at night school, blitzing all before him as he demolished every exam in his path.

Apart from an overly generous supply of the smarts, the Governor shares something in common with his predecessor, Glenn Stevens. That is, a measured and calculated approach.

The last thing any government wants is an RBA Governor who shoots from the hip. Nor someone who bends with the ebb and flow of public opinion.

Another trait both share is a clear disdain for publicity. You won’t find either elbowing others out of the way to get in front of a camera.

However, although similar in character, the times they served — or are serving now — are very different.

The end of the world

In his decade at the helm of the RBA, then-Governor Glenn Stevens’ profile grew markedly. As the subprime disaster played out, central banks the world over took on the responsibility of keeping the global economy afloat.

Every other morning, we saw news of another collapse.

Because of their role, these central bankers became a part of the news cycle. Every utterance, every comment, dissected by the markets.

The central banks were also incredibly active. In Stevens’ time as Governor, the RBA moved the cash rate a staggering 30 times. And not always by a quarter of a percent.

Between September 2008 and 4 February 2009, the cash rate decreased 4%. All the way from 7.25%, down to 3.25%, in a period of just five months. During those months, the RBA cut the rate by a full 1%, three separate times.

Under Dr Lowe, though, things have been very different. Since taking over the reins of the RBA, the cash rate has not budged at all. Not even a quarter percent.

What’s more, it is now 31 months since the cash rate last moved. That happened in August 2016 — a month before Dr Lowe became Governor.

By any comparison, the current Governor has enjoyed a much lower profile than his predecessor.

For an RBA governor, a low profile is a good thing. It means that everything is ticking along nicely. But could things be about to change?

Looking for that clue

As each monthly meeting comes and go, expectations of any rate move dwindle. So quiet has the action been with the cash rate, that the RBA meetings now barely rate a mention.

Commentators struggle to stifle their yawns, with each ‘no change’ announcement.

Go back a year, though, and interest rates looked to be on the rise. Fast forward to today, and the next move now appears to be the other way.

Only yesterday, Business Insider Australia quoted J P Morgan’s chief economist, Sally Auld:

We are changing our view on the RBA and now look for a 25 basis point (bp) rate cut in July, followed by a further 25bp easing in August…’

That’s a pretty big call after such a long period without a move. And two moves back-to-back? That hasn’t happened since May and June, 2012.

The reason behind J P Morgan’s call was yesterday’s less than impressive GDP numbers. The government quickly pointed to the drought and softening housing market for the fall.

And just like clockwork, the opposition soon chimed in. The opposition treasurer gave the government an ‘F’ result, for its economic management. Plus the usual glib comments about the lack of any wage growth.

For the RBA’s part, though, Dr Lowe played a steady hand, stating:

We have the flexibility to adjust monetary policy in either direction as required…’

He further added that: ‘At the moment, the probabilities appear reasonably evenly balanced.’

And that’s why the RBA is suddenly once again in the fray. Especially with an election only months away.

Any rate cut, if at all, won’t likely be until after the election. However, irrespective of which side is in government, a move down will clearly show that the economy is slowing down. And for wages, that means they are unlikely to rise any time soon.

Matt Hibbard
Editor, Options Trader

While many investors chase quick fire gains, Matt takes a different view. He is focused on two very clear goals. First: How to generate reliable and consistent income in a low-interest rate world. And second, how you can invest today to build wealth over the next 10–15 years. Matt researches income investments. You can find more of Matt’s work over at Total Income, where he is hunting down the next generation of dividend-paying companies for the future. He is also the editor of Options Trader, where he uses basic options strategies to generate additional streams of income beyond the regular dividend payments. Having worked for himself and with global firms for almost three decades, Matt has traded nearly every asset in existence. But now he is on a very different mission — to help investors generate income irrespective of what the market is doing. It’s about getting companies to pay you a steady, stable income, with minimal stress and the least risk possible. Matt doesn’t believe you have the luxury of being a bull or a bear in the market right now. You have to earn an income from it, regardless of whether stocks are going up or down. By getting the financial markets to pay you an income, you can get to focus on more important things than just money.

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