Then,earlier this month,Lowe announced a decision to spend a further $100 billion buying longer-dated bonds once the first $100 billion had gone. But,he insisted,the board had “no appetite” to push interest rates “into negative territory”.
So what do all these moves prove?
It’s understandable that Lowe should want to maintain public confidence that the independent authority which has had most influence over the day-to-day management of the economy for the past three decades,the Reserve,is at the helm,actively wielding an instrument that’s still highly effective in keeping us on course.
To this end,he has denied that monetary policy (the manipulation of interest rates) has run out of fire power. As he’s stepped further and further into unconventional measures,he’s suppressed his former reservations about their effectiveness and possible adverse side-effects,and striven to give the impression that everything’s under control and going fine. Monetary policy is playing an important part in getting the jobless back to work.
The reality is different. Movements in interest rates – whether achieved by conventional or unconventional means – affect different aspects of the economy via different mechanisms,or “channels”.
Loading
The most front-of-mind channel – “intertemporal substitution” – tells us a cut in the cost of credit encourages households to borrow more and spend it on consumption,while encouraging businesses to borrow more for investment in expansion. But if you read his words carefully,Lowe never claims his measures are causing this to happen – because it’s unlikely much of it is.
Rather,he alludes to the “cash flow” channel,saying lower rates are lowering the interest bills of households and businesses with existing debts,thereby leaving them with more money to spend on other things. True – but not terribly powerful,particularly since most people with home loans leave their monthly payments unchanged and thus pay off their mortgage a bit faster,a form of saving.
Inhis evidence to a parliamentary committee earlier this month,Lowe vigorously denied that the Reserve was “targeting the dollar” or that he saw signs of “currency manipulation” by other central banks (also known as “competitive devaluations”). Strictly true – but misleading.
Lowe isn’t “targeting the dollar” at a particular level or as a goal in its own right. But he cares deeply about the level of our currency’s rate of exchange against the currencies of our trading partners because this greatly affects the international price competitiveness of our export and import-competing industries,and thus how much they produce and how many people they employ.
When discussing the benefits his recent interest-rate moves have brought us,Lowe never fails to mention that they’ve caused our exchange rate to be “lower than otherwise”. That’s true – but it’s not a lot to show for all the Reserve’s lever-pulling. Lowe isn’t actually denying that monetary policy is much less effective in boosting demand than it used to be.
Loading
There’s little evidence that QE does much to increase demand for goods and services – as opposed to demand forassets such as shares and houses (probably with adverse consequences for the distribution of income and wealth). But it does seem clear that QE gives you a lower exchange rate.
Trouble is,when the Americans use QE to make their exchange rate more competitive,this makes other countries’ exchange ratesless competitive. So the Europeans and Japanese defend themselves and start doing it too.
Get it? Now all the big boys are doing it – and keep doing more – Lowe’s had little choice but to do it too. Had he resisted getting into the unknown waters of unconventional measures,our dollar would be a lot higher and hugely uncompetitive.
Which means almost everything he’s done over the past year hasn’t been making things better for the economy so much as stopping things getting worse. And it also suggests that,however much Lowe lacks an “appetite” for moving to negative interest rates,if the big boys choose to go further down that path,he’ll have little choice but to join them.
There are other issues on which Lowe has felt the need to be less than frank,but they’re for another day.
Business Briefing
Start the day with major stories,exclusive coverage and expert opinion from our leading business journalists delivered to your inbox.Sign up here.