Australia’s central bank governor Philip Lowe did not make it to last month`s Federal Reserve annual summit in Jackson Hole, Wyoming. But judging from the buzz at central banking’s answer to Davos, Lowe will be dealing with the fallout from those discussions 8,000-plus miles away for some time.
Even before the central bank chiefs of the U.S., Europe and Japan — Janet Yellen, Mario Draghi and Haruhiko Kuroda — arrived in the heart of Grand Teton National Park on Aug. 24, their Australian counterpart was fretting over a 10% appreciation in his currency this year. Reserve Bank of Australia Gov. Lowe warns it is eroding competitiveness and denting the outlook for employment and domestic output.
Things may be about to get worse. While Bank of Japan Gov. Kuroda was the only major central banker to speak bluntly about interest rates in Jackson Hole, U.S. and European officials are also engaged in a not-so-stealthy effort to weaken exchange rates. As Kuroda told Bloomberg, Japan’s recent 4% growth spurt was an aberration. “I think for some time we have to continue this extremely accommodative monetary policy,” he said.
In the central banking world of winks, nods and secret handshakes, that is code for the yen should be lower. European Central Bank President Draghi, in word and deed, favors a softer euro to support exporters. Washington is thinking along the same lines. As Fed Chair Yellen tightens, the quest for a lower dollar is being led by Donald Trump’s administration, one threatening trade wars and playing politics with the couple of AAA ratings it has left.
This is not quite a return to the currency clashes that shook global markets, say, in 2013. It is more of a policy Cold War between authorities dying to devalue, but treading carefully for fear of transporting markets back to the chaos of 2008. Expect this race to the bottom to intensify once China re-enters the fray, as President Xi Jinping is almost certain to do to keep gross domestic product moving. Ultimately, this dynamic will be swirling well into 2018.
All smaller advanced economies, like Australia, can do as this brinksmanship plays out is to batten down the hatches and get their own houses in order. That is easier said than done, as Lowe’s plight demonstrates. Should, for example, the RBA be cutting interest rates at the moment or raising them? The answer: Yes.
The point here is not to be cute, but Lowe does face a difficult quandary. Cut rates to support growth and the RBA risks pumping more air into a multi-year housing bubble. Hike them and Lowe may crash the market and, in turn, the only major economy that has avoided a recession for more than two decades.
The official who represented Lowe in Jackson Hole, Deputy Gov. Guy Debelle, put the brakes on rate-hike talk before jetting off to the American west. Instead of popping the housing bubble, the RBA is splitting the difference, using so-called macroprudential policies in ways that offer lessons to Asian economies experiencing bubble troubles.
Lowe inherited this tricky balancing act when he took the top central bank job in September 2016. Predecessor Glenn Stevens spent his own 10 years as governor dueling two powerful forcing driving up asset prices: Chinese millionaires and billionaires overpaying for real estate in Sydney, Melbourne, Brisbane and elsewhere and miners out west and in Queensland making bundles from Australia’s resources boom. These demand sources are partly to blame for a “two-speed economy” pitting those who can buy into surging property prices and those left behind.
Stevens and Lowe, deputy governor from 2012 to 2016, and regulators are moving to cool the frothiest parts of the housing market. Lawmakers in Canberra, for their part, cracked down on foreign purchases, applying fresh tax surcharges. The Australian Prudential Regulation Authority and the Australian Securities and Investments Commission have been targeting interest-only home loans. Officials also may impose stronger curbs on real-estate speculation, including mandating lower loan-to-valuation ratios and much larger downpayments.
But Australia is still on the front lines of too much liquidity in Frankfurt, Tokyo and Washington chasing too few productive investments. That is partly why neither Draghi nor Kuroda nor Yellen has gotten significant traction with quantitative-easing programs. More cash has gone into speculation — real estate and stocks, mostly — than into the conventional lending and borrowing activities that can make monetary policy so potent.
The answer for Australia lies more with Prime Minister Malcolm Turnbull’s team than Lowe’s. Australia has had an impressive run — no Group of 20 nation has avoided a sharp economic downturn for longer. That, and China’s seemingly insatiable demand for resources, have bred complacency in Canberra.
Turnbull’s government must now harness today’s low rates — 10-year bond yields are 2.7% — to build better roads, ports, bridges, power grids and communications systems. It must invest in productivity-enhancing industries, improve education and training and overhaul an uncompetitive tax system that has many of Australia’s best and brightest working overseas.
In the meantime, Lowe and his RBA staff will find themselves whipsawed by this Cold War in currencies — and bearing the brunt of the fallout. That is a rough place to be, as a surging Aussie dollar complicates an already disorienting financial environment Down Under.
William Pesek is a Tokyo-based journalist and author of “Japanization: What the world can learn from Japan’s lost decades.” He is a former columnist for Bloomberg.