Philip Lowe: Remarks at Reserve Bank Board Dinner
Remarks by Mr Philip Lowe, Governor of the Reserve Bank of Australia, at the Reserve Bank
Board Dinner, Perth, 4 September 2018.
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Good evening.
On behalf of the Reserve Bank Board I would like to warmly welcome you to this community
dinner. It is very good to be in Perth again. The Board met this morning at our office on St
Georges Terrace. This dinner is an opportunity for us to hear directly from you about how things
are going in Western Australia. So thank you for joining us.
As you have probably already heard, the Board left the cash rate unchanged at 1.5 per cent at its
meeting this morning. I doubt that this decision surprised anybody. The cash rate has been at
1.5 per cent for more than two years now and the Board expects it to remain there for a while yet.
Lest you think that keeping interest rates unchanged for an extended period means that life at the
Reserve Bank of Australia must be very quiet, we are always closely tracking domestic and
international developments and we have other important responsibilities that don't attract the
same spotlight as our monthly interest rate decisions.
The RBA is responsible for the issuing of Australia's banknotes. We are currently undertaking a
major upgrade of our notes to protect against counterfeiters. All up, there are 1.6 billion individual
banknotes on issue - that's an average of around 65 notes for each of the 25 million people in
Australia. Despite the growth of tap-and-go and other forms of electronic payments, the value of
notes on issue as a share of GDP is the highest in more than five decades. This highlights the
continued importance of banknotes as a store of value as well as a payment mechanism. So the
upgrade of the notes is a major logistical exercise.
The RBA is also the banker for the Australian Government. We operate the government's core
accounts and we are the transactional banker for many government departments. So if you get a
Medicare or tax refund, it comes from the government's accounts at the RBA.
We operate the core of Australia's payments system. The way that money moves from one bank
to another is through the accounts that financial institutions hold at the RBA. In addition, we
operate a key part of the infrastructure supporting Australia's new payments system, generally
referred to as 'the NPP'. This system allows you to move money between bank accounts in real
time on a 24/7 basis using an easily remembered 'PayID', such as a mobile number, to address
the payment. BSBs and account numbers can still be used, but if you have not already done so, I
encourage you to contact your bank to register a PayID, which makes it easier to use the new
system.
The RBA also regulates key parts of Australia's financial market infrastructure, including the
central counterparties at the ASX. In addition, we have broad responsibilities to promote
competition, efficiency and stability in Australia's payments system. As a result of decisions of
the Bank's Payments System Board there have been significant changes to the ATM and debit
and credit card systems over recent times.
The RBA also operates in financial markets every day to ensure the system as a whole has
adequate liquidity. We also have a broad responsibility for financial stability, including acting as
the lender of last resort in a financial crisis to provide liquidity to solvent institutions. Finally, we
manage Australia's foreign exchange reserves.
These are all important functions that we carry out in the public interest. They are all critical to the
functioning of our successful modern economy and financial system. I can assure you, we take
these responsibilities very seriously. This means that even when interest rates are being held
steady, we have a lot of things on our plate. But it is interest rates that mainly keep us in the
news.
At its meeting this morning, the Board's assessment was that the Australian economy is moving
in the right direction. Over the past year, GDP increased by 3.1 per cent and inflation was around
2 per cent. The unemployment rate is currently 5.3 per cent, which is the lowest it has been in
nearly six years. In the broad sweep of our history, these are a pretty positive set of numbers.
We will get another reading on the pulse of the economy tomorrow with the release of the June
quarter national accounts. We are expecting that this will confirm that over the first half of 2018,
the economy expanded at a faster than trend pace, making inroads into spare capacity. Our
central scenario is that economic growth this year and next will be a bit above 3 per cent, which
should see the unemployment rate come down further. So things are moving in the right
direction.
One of the factors helping us is that the global economy is expanding quite strongly. Many of the
advanced economies are growing quite strongly and unemployment rates in a number of them
are at multi-decade lows. The Chinese economy is also growing solidly, although the pace of
growth has slowed, partly as a result of efforts to put the financial sector on a more sustainable
footing.
The United States is most advanced in the process of monetary policy normalisation. This has
led to a broad-based appreciation of the US dollar this year. As a consequence, the Australian
dollar has depreciated. If sustained, this could be expected to improve the outlook for both
inflation and growth.
Notwithstanding the positive global picture, there are a number of international uncertainties that
we are monitoring closely. One is the possibility of an escalation in the current trade disputes. If
this were to happen, it would materially affect trade flows and investment plans around the world.
As a country that has benefited greatly from an open rules-based international system, Australia
has a strong interest in this not happening.
Another uncertainty we are watching closely is the possibility of a material lift in inflation in the
United States. The United States is experiencing a large fiscal stimulus at a time when the
economy is at full employment and is growing quickly. This is an unusual combination to say the
very least. Past experience suggests that it could lead to inflation increasing significantly.
Financial markets are, however, heavily discounting this possibility, which means that if it did take
place it would come as quite a surprise, with repercussions for markets and the real economy.
We are also monitoring carefully the financial and economic problems in a number of emerging
market economies with structural or institutional weaknesses, including Turkey, Brazil and
Argentina. If these problems were to escalate, they could put strains on parts of the global
financial system.
So these are some of the international issues we are keeping an eye on at the moment.
Domestically, the Board is closely monitoring housing markets across the country and trends in
housing finance. Housing credit growth has slowed, which, from a medium-term perspective, is
a positive development. Our assessment is that this slowing largely reflects reduced demand for
credit by investors, although there has been some tightening in the supply of credit as well. With
housing prices falling in a number of cities, largely due to a shift in the underlying fundamentals,
investors no longer find it as attractive to invest in residential property as they once did. This is a
normal part of the cycle. While credit standards have been tightened, mortgage credit remains
readily available.
I would note that some banks have increased their mortgage rates recently in response to
somewhat higher interest rates in short-term wholesale markets. A much less remarked upon
fact is that the average mortgage rate paid in Australia has fallen since August last year, as
lenders have increased their discounts. I encourage anyone with a mortgage to shop around:
there are some very good offerings out there. We can all play a role in promoting strong
competition in our financial sector by shopping around and taking advantage of the good deals
that are out there.
Another set of issues that the Board continues to pay close attention to is the outlook for wages
growth and inflation. Wages growth has been quite low recently. For some time my view has
been that some increase in aggregate wages growth would be a welcome development,
especially if it is backed by stronger productivity growth. Many business people that I speak to
recognise that a pick-up in overall wages growth would be a positive development from a macro
perspective, although not from the perspective of their individual business. So there is a tension
there. Our expectation is that wages growth will pick up from here, but the pick-up is likely to be
only gradual. Firms are currently reporting a record number of job vacancies and increasingly
telling us that it is hard to find workers with the right skills. One way of dealing with this increasing
tightness in the labour market is, of course, to lift wages. We expect that as this happens,
inflation will also lift towards the midpoint of the medium-term inflation target, although this, too, is
likely to be a gradual process.
Against this background, this morning the Board again decided to keep the cash rate steady at
1.5 per cent. We are seeking to be a source of stability and confidence, as further progress is
made towards full employment and having inflation return to around the midpoint of the target
range. As that progress is made, you could expect the next move in interest rates to be up, not
down. This would be a sign that overall economic conditions are returning to normal and would
take place against the backdrop of stronger growth in household income. But any move still
seems some way off, given the gradual nature of the progress expected on unemployment and
inflation.
At this morning's meeting, as well as a thorough review of the international and Australian
economies, we had a detailed discussion on the Western Australian economy. We pay close
attention to what is going on here: Western Australia accounts for a little over 14 per cent of
Australian GDP and 35 per cent of our exports, so it is important. Reflecting this, this is my third
trip to, and public speech in, Perth in the past year.
This morning we heard that while the Western Australian economy is still feeling the effects of a
decline in the level of mining investment, there are some positive signs. The level of mining
investment has further to fall as some large liquefied natural gas projects are completed. But
elsewhere in the resources sector things are looking brighter. Sustaining capital expenditure,
particularly in the iron ore sector, is picking up with positive spillover effects. Higher prices for a
number of minerals have also led to increased exploration activity, including for gold and lithium,
and an expansion of some existing mines is taking place. For the first time in a number of years,
we are hearing reports through our liaison program in Western Australia that it is difficult for firms
to find workers with the right skills, including project engineers and related occupations. Business
conditions - as measured by surveys - have also risen significantly and are now above average.
At our meeting, we also discussed the population dynamics here in Western Australia. At the
peak of the resources boom, annual population growth reached almost 31⁄2 per cent, which is
very fast. People moved here from overseas and from the rest of Australia to meet the needs of
your rapidly growing economy. In contrast, over the past year, population growth has slowed
sharply, to around 3⁄4 per cent, which is almost the slowest of any state in the country. There is
now a considerable net flow of people from Western Australia to the eastern states.
This change in population dynamics has had a significant effect on housing markets in Western
Australia. The earlier strong growth in population contributed to a sharp rise in housing prices and
rents, and then a bit later to a surge in housing construction. With the resources boom now in the
past, some of the earlier increases in prices and rents have been reversed and residential
construction activity has been low. Western Australia has seen this type of cycle before, and I
expect it will see it again at some point in the future. Our liaison, though, suggests that a
stabilisation of conditions is in prospect. If so, this should help support consumer confidence and
household spending and reinforce the recent more positive news from the resources sector.
Finally, as I mentioned earlier, we are currently upgrading Australia's banknotes. I am pleased to
be able to announce that the new $50 note will be released on 18 October. We are proud to have
a prominent West Australian on this note - Edith Cowan - as well as the Aboriginal writer and
inventor David Unaipon. The redesigned $50 note celebrates the fact that Edith Cowan was the
very first female member of an Australian Parliament. The microtext on the note will include an
extract from her first speech to the Western Australian Parliament. When the note is released,
those of you with great eyesight might be able to read this microtext without a microscope. But
for those who will struggle to read it, I would like to quote a little from the text. In 1921 Edith
Cowan said:
I stand here to-day in the unique position of being the first woman in an Australian
Parliament... If men and women can work for the same state side by side and
represent all the different sections of the community... I cannot doubt that we should
do very much better work in the community than was ever done before.
Nearly one hundred years on, this sentiment is just as relevant as it was back in 1921. We are
proud to have this text on the new $50 note and to recognise Edith Cowan's achievement. The
note will also have a seating plan of today's Western Australian Legislative Assembly. It will also
recognise Edith Cowan's lifelong advocacy of women. Western Australia's official bird emblem -
the iconic black swan - will also appear on the note a number of times. If the note is tilted you will
be able to see the colour of the swan change and its wings move. So I am sure that people here
in Western Australia will feel a great affinity for the note and enjoy spending it.
Once again, thank you for joining us and please enjoy the evening.