Philip Lowe: Opening statement to the House of Representatives
Standing Committee on Economics
Opening statement by Mr Philip Lowe, Governor of the Reserve Bank of Australia, to the House
of Representatives Standing Committee on Economics, Sydney, 24 February 2017.
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Chair
Members of the Committee
Thank you for the opportunity to appear today to explain how we see the Australian economy as
well as to discuss some of the work we have been doing at the Reserve Bank.
At the equivalent hearing a year ago, the tone of the global economy was pretty sombre. We had
seen turbulence in Chinese financial markets. Commodity and equity prices were declining.
Some overseas central banks had pushed their interest rates into negative territory. And global
growth forecasts were being lowered again.
Twelve months on, the global economy looks to be on a firmer footing. In China, the growth target
for 2016 was achieved despite the nervousness early in the year. In the United States, growth
has strengthened and the economy is operating at close to full employment. And in Europe, the
recovery is continuing, although it has a fair way to go in some countries. The Federal Reserve
increased interest rates in December and further rises are expected this year. Elsewhere in the
major economies there is no longer an expectation of further monetary easing, although some
central banks are still continuing to expand their balance sheets. Commodity prices have moved
higher. Long-term bond yields have also increased and most investors are no longer paying
governments to look after their money for 10 years. Headline inflation has risen in most countries,
and is much closer to target than it has been for some years. And forecasts for global growth
have been revised up over recent months. This is the first time this has happened for quite a few
years.
So, overall it is a more positive picture. That is the good news. There are, though, still a number
of significant risks on the horizon.
In China, the growth target was achieved last year partly through a further build-up in debt
especially to finance infrastructure investment and property development. This strategy was
clearly helpful in the short run and it supported commodity prices, and Australia has benefited
from that. But it runs counter to the Chinese authorities' goal of addressing the high levels of debt
and getting domestic finances on a more stable footing. So we can't be sure about the longer-run
implications. Recently, the Chinese authorities have taken some steps to tighten things up a bit.
They have also been managing a depreciation of their currency against the US dollar and
increased capital outflows as Chinese citizens send funds abroad. It's a difficult balancing act.
Turning to the United States, we can't be confident about how things will play out. It is possible
that the new administration's policies could boost US and global growth. More infrastructure
investment, tax reform and deregulation could all work to that end. On the other hand, if there
were to be a retreat from the open international trading system, that would be damaging to the
global economy, including to us here in Australia. We have much to lose if this were to occur. It is
too early to tell which way things will go. Like others, we are in 'wait and see' mode.
In Europe, while there have been no major problems for some time, there are still a number of
faultlines. Some of these could be put under pressure in the year ahead, in many cases
depending on the outcomes of elections.
So there are still a number of risks in the global economy, although they no longer seem tilted to
the downside. There are reasonable scenarios in which global growth picks up further and other
scenarios in which it disappoints again.
I would now like to turn to the domestic economy.
A year ago, we were expecting the Australian economy to grow by around 21⁄2-3 per cent in
2016. We haven't yet received the final figures for the year, but the outcome is likely to be lower,
at around 2 per cent. The September quarter was surprisingly weak, largely reflecting temporary
factors. We are not expecting a repeat of this for the December quarter, with most of the
available indictors suggesting a return to reasonable growth in the quarter.
Looking forward, we still expect the Australian economy to grow by around 3 per cent this year
and next. For most of the time since 2012 we have been facing headwinds from declining mining
investment and falling commodity prices. Then, around the middle of last year, the headwind
from falling commodity prices turned into a gentle tailwind as commodity prices lifted. And the
headwind from falling mining investment should blow itself out before too long as mining
investment returns to more normal levels. We will also benefit over the next few years from large
increases in production of liquefied natural gas.
Economic conditions continue to vary significantly across the country. They are weaker in those
parts of the country adjusting to the lower levels of mining investment and they are stronger
elsewhere. Nationally, measures of business conditions have picked up noticeably recently. For
some time we have been waiting for a lift in non-mining business investment. It has been a long
time coming. Encouragingly, in New South Wales and Victoria we have now seen a reasonable
pick-up in investment. However, we are yet to see this in most other states, where the unwinding
of the mining investment boom continues to affect the overall business climate. With the decline
in mining investment coming to an end, we hope to see a broader pick-up over time.
One area that we are watching closely is the cycle in residential construction activity, as the
upswing has helped support the economy over recent years. The rate of new building approvals
has slowed, but there is a large amount of work still in the pipeline, particularly for apartments, so
we still expect some further growth in this part of the economy this year. There has, however,
been some tightening in conditions for property developers in some markets.
In the broader housing market, the picture remains quite complicated. There is not a single story
across the country. In parts of the country that have been adjusting to the downswing in mining
investment or where there have been big increases in supply of apartments, housing prices have
declined. In other parts, where the economy has been stronger and the supply-side has had
trouble keeping up with strong population growth, housing prices are still rising quickly. In most
areas, growth in rents is low. And recently we have seen a pick-up in growth in credit to
investors, which needs to be watched carefully.
In terms of consumer prices, a year ago we had expected the inflation rate to remain above 2 per
cent. It has turned out to be lower than this last year, at around 11⁄2 per cent. Wage growth has
been quite subdued, reflecting spare capacity in the labour market and the adjustment to the
unwinding of the mining investment boom. We anticipate the subdued outcomes to continue for a
while yet. Increased competition in retailing is also having an effect on prices, as is the low rate of
increase in rents.
We do not expect the rate of inflation to fall further. Our judgement is that there are reasonable
prospects for inflation to rise towards the middle of the target over time. The recent improvement
in the global economy provides some extra assurance on this front. Headline inflation is expected
to be back above 2 per cent later this year, boosted by higher prices for petrol and tobacco. The
pick-up in underlying inflation is expected to be more gradual.
Since we appeared before this Committee last September, the Reserve Bank Board has kept the
cash rate unchanged at 1.5 per cent.
At its recent meetings the Board has been paying close attention to the outlook for inflation as
well as two other issues: trends in household borrowing and in the labour market.
One of the ways in which monetary policy works is to make it easier for people to borrow and
spend. But there is a balance to be struck. Too much borrowing today can create problems for
tomorrow, because debt does have to be repaid. At the moment, most households with
borrowings do seem to be coping pretty well. But the current high level of debt, combined with
low nominal income growth, is affecting the appetite of households to spend, and we are seeing
some evidence of this in the consumption figures. The balance that is required is to support
spending in the economy today while avoiding creating fragilities in household balance sheets
that could cause problems for the economy later on. This is also something we need to watch
carefully.
Trends in the labour market are also important. As in the housing market, the picture in the labour
market varies significantly around the country. Overall, the unemployment rate has been steady
now for a little over a year at around 53⁄4 per cent. In a historical context this would have been
considered a good outcome, although, today, a sustainably lower unemployment rate should be
possible in Australia. The other aspect of the labour market that is worth noting is the continuing
trend towards part-time employment. Over the past year, all the growth in employment is
accounted for by part-time jobs. There is a structural element to this, but it is also partly cyclical.
We expect that the unemployment rate will remain around its current level for a while yet.
The Reserve Bank Board continues to balance these various issues within the framework of our
flexible medium-term inflation target, which aims to achieve an average rate of inflation over time
of 2 point something. Our judgement is that the current setting of the cash rate is consistent with
both this and achieving sustainable growth in our economy. We will continue to review that
judgement at future meetings.
I would like to turn to some other aspects of the work we do at the Reserve Bank.
In the area of payments, the Reserve Bank is continuing to work with industry on the
development of the new payments infrastructure that will allow us all to move money around and
make electronic payments more easily. The Bank is building part of the infrastructure that stands
at the centre of this new system that will allow funds to be exchanged instantaneously so that
customers can have very quick access to their funds. Our work is on schedule and is now being
used in industry testing. Financial institutions are also working hard on their internal systems so
that customers can take advantage of the new system. Developments look to be on track to
allow the first payments to be made through this new system towards the end of the year.
A related focus of the Payments System Board is the important role that new technologies can
play in promoting efficiency and competition. In recent meetings the Board has discussed the
opportunities that distributed ledger technology could offer in the payments system and in
financial market infrastructures. And it is also interested in the potential for fintech to deliver
improved customer experiences. The Board is therefore taking a keen interest in the work being
done by the Australian Payments Council on digital identity and customers' access to their
banking and payments data.
I hope that you have all come across the new $5 banknote, which was issued by the Bank from
early September last year. The note was well received by the community. You might also have
noticed that last Friday we released the design for the new $10 banknote. Like the new $5, the
new $10 will have world-leading security features, including the clear top-to-bottom window and a
rolling colour effect that changes as the banknote is tilted. It will also have two raised bumps to
assist people with vision impairment. Just like the current $10 note, the new note will feature two
of Australia's most famous writers, Dame Mary Gilmore and Banjo Paterson. The printing
presses are busy printing the new notes and they will be issued from September this year. We
are also finalising the design of the new $50 banknote, which we plan to issue next year.
One other matter that I would like to bring to your attention is that we are in the process of
commissioning an external review of the efficiency of our operations. We want to make sure that
we are continuously improving as an organisation and we are seeking outside assistance to
identify opportunities for improvement. The review will be focused primarily on operational and
administrative matters and not on our policy frameworks. It will commence within the next month
and I will be in a position to share the key conclusions with the Committee when we meet later in
the year.
Finally, at previous hearings members of the Committee asked about the number of women at
senior levels of the Reserve Bank. I am pleased to be able to report that we have made further
progress here. Of the three assistant governors responsible for monetary and financial policies
at the Reserve Bank, two are women. And women run over a third of the departments in the
Bank, including those responsible for the Bank's economic analysis function and for the
implementation of monetary policy. So it's quite a big change from days gone by when almost all
of these important positions were held by men. I want to highlight these changes in the hope that
they might provide some inspiration to women who are thinking of studying economics, finance
and business. There are fantastic career opportunities out there and it would be great to see
more women studying these disciplines, and perhaps considering a career at Australia's central
bank. We are currently working on some initiatives to encourage this, at both the school and
university level.
Thank you. My colleagues and I are here to answer your questions.