***EMBARGO UNTIL 10TH SEPTEMBER 2016 FOR AFR *** RBA Governor Glenn stevens for the final exit interview by the AFR. Wednesday 7th September 2016 AFR photo Louie Douvis .
It’s one of the most time-worn and sacred traditions of ‘s central bank that January be declared a no-meeting month.
Every other month of the year, on the first Tuesday, the Reserve Bank governor and his board (it’s always been “his”) assemble in the bank’s Martin Place headquarters in Sydney to discuss policy settings.
But not January.
During the darkest days of the global financial crisis, there was intense speculation that then-governor Glenn Stevens would interrupt the summer holiday plans of his board and call an extraordinary meeting to deliver the economy another dose of monetary policy designed to avert economic disaster.
That December, in my early days of journalism, I vividly remember rising from my seat in a ballroom packed full of ‘s top economists to quiz Stevens – not on some intricacy of monetary policy – but on his holiday plans.
His answer was characteristically dead pan, and evasive. He sent me an email that afternoon, expressing concern that I should not think he was trying to dismiss me, rather that he simply didn’t want to answer that particular question.
As a young female journalist I still have the email and have never forgotten the lesson: just because a powerful respondent deflects your question, that doesn’t mean you shouldn’t have asked it. In fact, sometimes it means you’ve asked precisely the right question and struck a raw nerve.
As it turned out, Stevens did not break with tradition, and January remains a sacred time of beaches and boardies for ‘s top monetary policy econocrats. (Actually, that’s not exactly true. Some of them regularly swap their summer holidays to attend meetings in snow-soaked Basel. Central bankers are a unique species.)
This summer is no exception, with current governor Philip Lowe and Co spared, as usual, a January trip to the boardroom.
It’s a seemingly relaxed start to the year for a governor who has, on the face of things, done very little during his tenure.
Since talking the helm from Stevens in September 2016, Lowe has presided over 14 monthly meetings, at which interest rates have been changed precisely zero times.
But of course, like the proverbial duck, much work is going on behind the scenes. You don’t just slam interest rates down to record low levels and then set and forget.
The greatest economic question facing the n economy in 2018 is whether this will mark the year when the Reserve Bank begins the painful process – for mortgage holders at least – of putting interest rates back on something approaching a normal setting.
Markets are pricing in the likelihood that Lowe will deliver one interest rate increase by the end of 2018.
There are many who doubt even that, pointing to weak wages growth and concerns about triggering a more pronounced decline in already cooling property markets.
My sense, as we begin a fresh year, is that many market participants are set to be taken by surprise by the timing of future interest rate rises.
Of course, any hikes depend on continued good news about joblessness and growth. This week’s solid retail sales for November are encouraging.
The minutes of the last board meeting point to trend economic growth, solid jobs growth, positive business conditions and declining spare capacity.
Inflation, of course, remains stubbornly low at below 2 per cent.
There are many who simply refuse to countenance that rates can rise while ever prices and wages growth is so weak. But that is misguided.
Monetary policy works with a considerable time lag, of around a year and a half. It takes time for businesses and consumers to respond to rate changes, so decisions must be made now about what the appropriate level of rates will be next year and beyond.
While it may no longer hold true, previous episodes have shown that wages growth, when it does turn, can do so rapidly, meaning vigilance against a wage and price acceleration – however unlikely it may seem – is prudent.
It is true that interest rates are unlikely to need to rise to the same levels as before to have the same effect. In the lingo, the “neutral” rate of interest – the policy rate at which monetary policy is neither stimulatory nor contractionary – has fallen.
But not this low. Barring some other financial shock, it is only sensible to assume interest rates will need to rise.
The Reserve Bank knows it, but don’t expect to be hearing much about it before the time.
Any whiff that interest rates are set to rise will only send the Aussie dollar higher, hurting exporters and choking off the very recovery the Reserve is keen to ensure is in place before it can normalise rates.
Given this constraint, the Reserve Bank will not be able to telegraph its intention to raise interest rates much earlier than the actual time it decides such measures are needed. And needed they will be.
While concerns remain about the more sluggish pace of the economy post-GFC, there are considerable risks too of leaving interest rates at record lows, including potential mispricing of risk and asset bubbles.
Which I’ll get to next week.
Ross Gittins is on leave.