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, 16 february 2018. * * * chair members of the committee my colleagues and i welcome these opportunities to explain our thinking on the australian economy and to answer your questions. we view it as an important part of the accountability process for the reserve bank. since we last met in august, the improvement in the global economy has continued and forecasts for world growth have been revised up. rather than just one or two economies doing better, the improvement has been broadly based, with a synchronised upswing taking place. partly as a result, both international trade and commodity prices have picked up and this is helping the australian economy. the stronger economic growth has resulted in unemployment rates falling further. in a number of countries, the unemployment rate is now below conventional estimates of full employment. inflation has remained low, partly reflecting the fact that wage growth has been quite subdued despite the low unemployment rates. low inflation has meant low interest rates. and for much of past year, volatility in asset prices was also unusually low. over recent times, many investors have been proceeding on the basis that this combination of strong growth, low unemployment, low inflation and low interest rates would persist. many also expected the low volatility in asset prices to continue. a couple of weeks ago we saw a reevaluation of some of these assumptions by some investors, with the catalyst being a pick - up in wage growth in the united states. the result has been an increase in bond yields, a decline in equity prices and increased market volatility. while the exact timing of changes in investors ’ assumptions is difficult to predict, the fact that some reassessment took place, at some point, is not that surprising. above - trend growth at a time of low unemployment should be expected to see inflation lift, even if that lift is gradual because of factors that are affecting wage and price pressures globally. to add to the mix, fiscal policy in some countries, most noticeably the united states, is becoming more expansionary. so i expect rising inflation pressures will figure more prominently in discussions of the global economy than they have for some time. another important international influence on our economy is what happens in china. like other economies, china is benefiting from the global upswing. at the same time, there are

investment boom ; the heightened sense of competition due to globalisation and technological change ; and changes in bargaining arrangements. these factors are still at work, although through our liaison program we hear reports of pockets where the labour market is tight and firms are finding it hard to find workers with the right skills. in some of these areas wages are now rising more quickly than previously, but many firms remain wary of adding to their cost base in the current environment. over time, we expect wage growth to pick up as the labour market strengthens further. the pickup, though, is likely to be gradual. this increase in wage growth and the more general reduction in spare capacity in the economy are expected to contribute to inflation picking up as well. but to continue the theme, this pick - up, too, is expected to be only gradual. this year and next, we expect cpi inflation to be between 2 and 2½ per cent. as you would be aware, the reserve bank board has held the cash rate at 1½ per cent since august 2016. this represents an accommodative setting of monetary policy, aimed at supporting the economy and employment, and returning inflation towards the mid - point of the medium - term target range. as we have discussed with this committee on previous occasions, the board has sought to strike a balance between these benefits of monetary stimulus and the medium - term risks associated with the increase in the already high level of household debt. we have sought to steer a middle course, promoting sustainable growth in the economy. over the past year the economy has been moving in the right direction. progress has been made in reducing unemployment and having inflation return to around the mid - point of the target range. and on the financial side, the build - up of risks in household balance sheets has been contained, although risks there remain. over the coming year we expect to make further progress. our central scenario for the australian economy is for a further reduction in the unemployment rate and an increase in inflation towards the mid - point of the target range. of course, this is just the central scenario, and there are other scenarios as well. but if this is how things play out, at some point it will be appropriate to have less monetary stimulus and for interest rates in australia to move up, as is already happening in some other countries. in other words, it is more likely that the next move in interest rates will be up, rather than down. the timing of any future move will depend upon the extent