New Reserve Bank Governor sets out his views: CommSec's Craig James

Craig JamesSeptember 21, 20160 min read


When asked whether Australia at risk of running out policy options, the Reserve Bank Governor stated categorically “not at all”.

But the Governor also said that it was “not particularly useful” to keep on cutting interest rates in the hope that it will eventually work to lift growth. 

The Reserve Bank Governor released a number of charts entitled “Major Bank Funding Developments”. The charts help to explain recent interest rate decisions taken by banks on the pricing of assets and liabilities. 

 Governor Lowe says it is “possible” that interest rates could fall further but it will depend on a number of factors such as inflation, the job market, housing and global factors. 
Prepared comments 

 Economic assessment: "Overall, the economy is adjusting reasonably well to the unwinding of the biggest mining investment boom in more than a century. This is a significant achievement. We are managing this adjustment partly because of the flexibility of the exchange rate and the flexibility of wages and through the support provided by monetary policy.” 

Income growth: “The story on income growth has been less positive, with growth in nominal GDP being disappointing.” 

 China: faces a “difficult economic transition”. “Overall, the latest available data suggest that there has not been a major interruption to growth, although this is partly because the economy is being supported by fiscal policy, including expenditure on infrastructure.” 

Global monetary policy: “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.”

  Housing: “Overall, then, the situation is somewhat more comfortable than it was a year ago, although we continue to watch things carefully.”

  Mining: “While mining investment still has some way to fall, our estimate is that around three-quarters of the total decline is now behind us.”
Question & answers

Non-mining growth: Growth is “fairly widespread”. Reasons for good growth include population growth, the stability of banking system and the remarkable flexibility of our economy.

Lower exchange rate: has boosted growth in tourism as well as led to higher inflows of foreign students. The lower exchange rate has made a “material difference” to inbound and outbound flows of people. A “lower exchange rate would be helpful”. Although it is “understandable” that the Aussie dollar has lifted in recent months.

Employment: The services sector is doing well. Part-time employment is stronger than full-time but that reflects the dependence of services sector on part-time workers. The Governor believes that there is greater “slack” in the job market than indicated by the low jobless rate.

Rate changes by banks: the failure to pass through the last rate cut “wasn’t unexpected”. But the lack of pass- through doesn’t provide extra complications for monetary policy.

The Reserve Bank Governor circulated some charts to explain changes in financial conditions affecting banks such as net interest margin and the return on equity. Banks have had to hold more low yielding assets in recent years. To maintain the return on equity, borrowers have had to absorb more of cost than shareholders.

Infrastructure: The Reserve Bank Governor believes that more could be spent on transport infrastructure in Australian capital cities.

Is the Reserve Bank running out of policy options? “Not at all”. The Reserve Bank Governor said it was very unlikely that we get into a situation of using unconventional monetary policy.

Reserve Bank Governor rejects the notion that Australian living standards have fallen and that inequality has been rising.

What are the implications for interest rates and investors?

The new Reserve Bank Governor has made it clear that interest rates are not on a predefined course. While rates may fall again, a range of factors will be evaluated before that decision is made.  

It is likely that the Reserve Bank Governor will continue to emphasise the limits to monetary policy just as his predecessor did. 

Craig James is the chief economist at CommSec.

Craig James

Craig James is the Chief Economist at CommSec, interpreting ‘big picture’ economic and financial trends.
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