RBA Lowe's Speech: Will it be About Rates or Econ Prospects?

By Sophia Rodrigues

     SYDNEY (MNI) - The Reserve Bank of Australia Governor Philip Lowe's speech

later Thursday is generating a lot of anticipation as the topic "The Next

Chapter" has led to speculation whether he would talk about prospects for rate

rises ahead.

     Such speculation cannot be entirely dismissed given the upbeat tone in

recent RBA communication, in particular Lowe's comment on the evening of

September 5, hours after the RBA's cash rate decision. Lowe said that as the

economy makes "further progress on both unemployment and inflation, we could

expect the cash rate to move towards this (3.5%) neutral rate over time."

     Lowe will be speaking in Perth to the American Chamber of Commerce in

Australia business briefing at 1310 hours Sydney time (0310 GMT)

     Assistant Governor for economics Luci Ellis' speech Wednesday is the most

recent example of the recent optimistic message from the RBA, when she said the

turning point in the pickup of the global economy was around the end of last

year and that is positive news for the Australian economy.

     The money market has picked up this optimism and pushed up pricing for cash

rate expectations, with nearly 80% chance of a 25bps hike now priced in for May

2018. Analysts at three of the four big Australian banks are now forecasting at

least one cash rate hike next year, and at least three economists in an MNI poll

see the first hike coming as early as Q1 of 2018.

     Given the cash rate is the only tool at the disposable of the RBA, it is

not surprising that there is lot of reliance placed on "open mouth operations"

to shape expectations. To that extent, it also wouldn't surprise if Lowe used

the speech to provide more clarity, including endorsing or toning down

expectations. 

     At the same time, it is entirely likely that the next chapter that Lowe

will talk about has to do with the growth outlook for the economy, with more

discussion on the next growth drivers both locally and globally. India may find

a mention, too.

     Such a presentation would be in line with speech delivered by former

governor Glenn Stevens in November 2015 entitled "The Long Run". 

     Given the location of today's speech, one shouldn't dismiss the possibility

that Lowe would update on the "After the Boom" speech given by Stevens in Perth

in December 2015.

     "I expect that, in a few years' time, the Reserve Bank Board will once

again meet in Perth. I imagine that, by then, the current contraction in capital

spending will probably have reached an end. New opportunities for growth will

have emerged, resulting from things like the growth in the middle class of Asia,

with all what that means for demand for services as well as for energy and

agricultural production. The growth of India is surely also a potential

opportunity for (Western Australia) - facing as you do the Indian Ocean, and

with the advantage of relative lesser distance. A mere eight hour flight time!

No doubt Western Australians will be looking to seize those opportunities,"

Stevens said in that speech.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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