Rate cuts have Australia on the right path: RBA

by Bloomberg23 Sep 2016
Reserve Bank of Australia (RBA) Governor Philip Lowe said his colleagues have not been “nutters” when it came to achieving their inflation target and reiterated the importance of elevating financial stability in policy making.

“We have not seen our job as always keeping inflation tightly in a narrow range,” Lowe told a parliamentary panel in Sydney Thursday. “We have had a more balanced perspective, recognizing that some degree of variability in inflation from year to year is both inevitable and appropriate.”

Lowe, who took charge at the RBA this week, inherited an economy with interest rates and wage growth at record lows, reflecting anemic inflation. Yet growth is above average and unemployment has fallen to a three-year low. The central bank has lowered borrowing costs twice in the past four months to try to cap a currency supported by negative rates and bond-buying programs from Europe to Japan and a Federal Reserve hesitant to tighten.

Capital Flows

“While these actions have generally not been taken with the direct intention of influencing exchange rates, they have, inevitably, affected international capital flows and exchange rates,” Lowe told the House Economics Committee. “We have seen the effects here in Australia. The monetary expansion elsewhere and the low rates on offer overseas have meant that foreign investors have found Australian assets, with their relatively higher returns, attractive. In this way, what is happening elsewhere affects us here in Australia.”

The Australian dollar has climbed more than 10% since a mid-January trough, hampering the economy’s transition to growth driven by services as a mining investment boom unwinds. The key education and tourism industries are hyper-sensitive to the currency and had received a tailwind from a more than 25% depreciation since the start of 2013.

“A lower exchange rate would be helpful,” Lowe said in response to a question. “But of course we all can’t have one.” The recent rise in the Aussie partly reflects higher commodity prices and the yield on offer in Australia, he said.

Unconventional Policy

The central bank has previously indicated that interest rates can become less effective at 1%. When asked about the limits of monetary policy in Australia, Lowe said the central bank was “not at all” running out of options and the economy was unlikely to require highly unconventional policies “because of the path we’re on.”

Lowe said that central banks around the world lament the lack of government infrastructure spending amid a low-rate environment and the high global reliance on monetary policy.

The RBA’s rate cuts have spurred the housing markets in Sydney and Melbourne, leading some observers to warn of bubble-like conditions. Lowe said the outlook is improving following regulatory measures to curb lending to investors and as new stock comes in line.

“The construction cycle has a bit more momentum than we expected earlier,” he said. “Credit growth and turnover in the housing market are also lower than they were a year ago. Under APRA’s guidance, lending standards have also been tightened. Overall, then, the situation is somewhat more comfortable than it was a year ago, although we continue to watch things carefully.”

Traders are pricing in little chance of the RBA raising rates this year, just over 25% in December, though bets rise to around 50% by the middle of next year.