Want to Know Where Rates Are Heading? Don’t Ask the Fed

(Bloomberg Opinion) -- Australia is still a continent, but it's no longer an island. The country that was once immune to business cycles is being sucked deeper into the vortex of global monetary easing. That's a measure of how pronounced and far-reaching the world economy's downdraft has become.

The Reserve Bank of Australia used to follow the U.S. Federal Reserve in its monetary moves, sometimes with a considerable delay. No more. The RBA’s recent actions, including Tuesday's interest-rate cut, suggest it's all too aware of the forces driving the global economic slowdown. Governor Philip Lowe is racing toward zero borrowing costs and, quite possibly, once unthinkable measures such as quantitative easing and negative rates.

That's scary because the country acquired a reputation in the past three decades as a magical land where recessions didn’t happen. In reality, things were never that rosy. Now, they look much bleaker. After two successive rate reductions in June and July, observers reckoned the RBA would hold at 1% and assess the scene for a while. Officials clearly weren't reassured by what they saw and opted for another quarter-point reduction, with more likely to come.

At this point, you have to entertain the troubling possibility that Lowe is reading the tides of global economics more adroitly than Fed Chair Jerome Powell. That’s a sign of how our unipolar financial world is fraying around the edges. The power of the dollar and the weight of U.S. commerce make the Fed first among equals. Yet a number of Asia-Pacific authorities besides the RBA have preempted the Fed, as I wrote here. The U.S. central bank still sketches the broad direction. What, though, if others can see the lay of land more clearly?  

Tuesday's cut notwithstanding, the most revealing recent comment from Lowe was tucked into a speech in Armidale, a provincial town of about 30,000 people. After waxing briefly about his own upbringing in a rural area, Lowe dived into the workings of the international economy. This gem is remarkable for its candor: 

“We live in an interconnected world, which means that we cannot completely insulate ourselves from long-lasting shifts in global interest rates. Our floating exchange rate gives us a degree of monetary independence, but we can't ignore structural shifts in global interest rates. If we did seek to ignore these shifts, our exchange rate would appreciate, which, in the current environment, would be unhelpful in terms of achieving both the inflation target and full employment.'”

Lowe underlined the theme in the statement accompanying the latest cut. In addition to buttressing the domestic labor market and boosting the chances inflation will return to the central bank’s 2% target, the board also noted “the trend to lower interest rates globally and the effects this trend is having on the Australian economy.”

Jobs are also getting a noteworthy elevation in RBA deliberations. The central bank made all the right noises about cranking up inflation toward the hallowed 2%, but they have an perfunctory tone to them. The top and bottom of Tuesday's communique give labor primary billing.

That's also a sign of the times. The big policy issues in all corners of the world concern growth, jobs and exchange rates. Inflation is like the relative you have to invite to dinner, but who’s sat at the end of the table.

Far from being isolated from the economic cares of the planet, Australia is in the thick of them. If you want to take the global temperature, Lowe may be a better bet than Powell.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

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