If you’re wondering what to expect from new RBA governor Philip Lowe, Westpac’s chief economist, Bill Evans, thinks he has the answer.
In a note released earlier today, Evans singled out what he deems to be the new governor’s “defining moment” as a policymaker, pointing to a research paper published by Lowe when he was working at the Bank of International Settlements (BIS) in July 2002 that goes some way to explaining what policy differences he’s likely to bring as RBA governor.
Here’s a snippet from Evans’ note:
He argued in his paper, that “financial imbalances can build up in a low inflation environment and that in some circumstances it is appropriate for policy to respond to contain imbalances… while low and stable inflation promotes financial stability, it also increases the likelihood that excess demand pressures show up first in credit aggregates and asset prices, rather than in goods and services prices. Accordingly, in some situations, a monetary response to credit and asset markets may be appropriate to preserve both financial and monetary stability”. He further concluded that “greater co-operation between monetary and prudential authorities is important, not just in management of crises but also in preventing their emergence”.
According to Evans, the paper “gives us a clear insight into the values of the new governor”, suggesting that if former US Federal Reserve chair Alan Greenspan had adopted a similar view on policy to that of Lowe, “the world may have avoided the Global Financial Crisis”.
“We expect that these values will be an important driver of future policy,” says Evans.
“The balance between driving towards a higher inflation target and over stimulating asset markets (including housing) will take on a sharper edge than we have seen in the past.
“He is also likely to be open to the use of further macro prudential tools (as highlighted in that paper) should that be seen to be necessary.”
Philip Lowe will chair his first monetary policy meeting as RBA governor on Tuesday, October 4.
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