RBA's Lowe strikes optimistic tone: ANZ's Cherelle Murphy
GUEST OBSERVER
RBA Deputy Governor Philip Lowe struck an optimistic tone today, and noted that the Bank retains flexibility on interest rates.
He emphasised that Australia’s economic fundamentals were good and the economy has high degree of flexibility at the CFA Institute Australia Investment Conference in Sydney.
Most of Dr Lowe’s remarks focused on the microeconomic reform agenda that would lift Australia’s living standard over the medium term, and so he did not directly address the near term path for interest rates in his speech. In the Q&A though, he answered several questions related to the immediate outlook and monetary policy and repeated the bank’s expectation that growth will gradually pick up.
Some key points Dr Lowe made were:
There continued to be some flexibility in monetary policy given the cash rate had not been reduced to zero as policy rates have in many other advanced countries.Monetary policy still works, as seen through its impact on housing construction and the exchange rate. But lower interest rates are not as effective as they used to be, as low interest rates seem to be helping households to pay back their debt sooner, rather than encouraging household spending.
There is still some flexibility in fiscal policy due to our history of fiscal prudence.
The probability of recession is low but we cannot rule out the possibility of a downturn. There will be a cycle, and we have had a remarkable 25 years.
He said that comments about consumer and business confidence being weak were not correct. On cue, this morning’s ANZ-Roy Morgan Australian Consumer Confidence index showed a 5.1% rise in the week ending 11 October, bringing confidence 2.6% above its long run averageDr Lowe said business conditions were above average overall and that business was reporting that current conditions are ok. He said firms were willing to hire and as they have stated many times before, it is not clear at what point this will translate into higher capex.
When asked if state stamp duties should be used to soften demand for housing, he said it is a mistake to think house prices can be managed through levers that affect demand. He repeated that regulatory action on lending is working its way through the system. Dr Lowe said that ideally there would be a period of quite modest house price growth.
On the US he said there has been some movements in capital flows from emerging markets back to the US, even ahead of the Federal Reserve increase in rates. He said there might be some stresses in capital markets.
Dr Lowe did not address our concerns about growth in 2016 and 2017, which recently led us to lower our interest forecast to 1.5% by mid next year. We think further rate cuts will be necessary as concerns simmer about the unpredictability of international economic conditions, while the boost from housing starts to fade as the impact of the lower AUD on services trade lessens. Dr Lowe noted that monetary policy maintains a key role in dealing with cyclical swings in the economy.
Cherelle Murphy is co-head of Australian economics, ANZ, and can be contacted here.