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Lowe Signals Less Aggressive Approach to Interest Rates

In a recent speech, Reserve Bank governor Philip Lowe hinted at a more cautious approach to interest rate increases, which may be his final speech before Treasurer Jim Chalmers decides whether to extend his term. Lowe announced several significant changes to the operations of the bank, including reducing the number of annual board meetings and introducing post-meeting press conferences. These changes are part of the recommendations from an independent review conducted earlier this year.

One of the key recommendations of the review is the creation of a board of monetary policy experts and a separate board for governance, which is expected to be established by July 2024. Other changes from the review, such as publishing unattributed board members’ votes, will be decided by future RBA boards.

In his speech, Lowe took a cautious stance on the future of monetary policy. He noted that it is not yet clear whether further tightening is needed to bring inflation back to target levels. The cash rate is currently at an 11-year high of 4.1%, and any future rate increases will depend on how the economy and inflation evolve.

Market expectations for a rate increase in August decreased slightly following Lowe’s speech. The market now implies a 51% chance of a 0.25 percentage point rate increase at the next board meeting, down from 60% the previous day. Expectations for the peak rate also decreased slightly, reflecting a more cautious outlook on global interest rate increases.

While Lowe’s speech was seen as dovish by economists, it came shortly before Treasurer Chalmers revealed that he would soon discuss whether to replace Lowe when his term ends in September. Chalmers indicated that there would be a cabinet discussion followed by an announcement about Lowe’s replacement.

Overall, Lowe’s speech and the changes to the operations of the RBA signal a more cautious approach to interest rate increases. The future direction of monetary policy will depend on the performance of the economy and inflation. The establishment of a board of monetary policy experts and increased transparency about board members’ votes will also be key changes to watch for in the coming years.


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