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. * * * 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

in the foreseeable future. it has been happening in japan for several years. it is not happening in the other major countries, though inflation rates are quite low there now, and deflation is a little more common internationally than it has been in the past few decades. it is quite possible that more countries will experience a mild degree of deflation at some point in the next few years, and not entirely inconceivable that one or two of the major countries might be among them. • in the majority of cases deflation clearly is a symptom of weakness of demand and output, or would be if it occurred, and is a matter of concern for that reason. • in relatively few cases is it likely that expected deflation will itself cause further economic weakness. japan is arguably in that position, but few if any of the other countries currently experiencing deflation seem likely to find that the natural rate of interest is so low that policy rates cannot get below it. whether or not one thinks the zero interest rate constraint is likely to bind in the us or the euro area, were they to experience deflation, hinges on one's view about the outlook for returns to capital. these might be poor in some sectors, but it does not follow that they are that poor across the board. having said all that, japan's experience shows that deflation can happen, and so we should still ask : what should be the response of policymakers given the possibility, or the reality, of deflation? the first thing to say is that, for most countries, deflation is an outcome which is to be avoided, just like inflation is to be avoided. stability in the general level of prices, interpreted in practice as a low but positive rate of price increase, is the appropriate goal. forward - looking monetary policies should be seeking to maintain inflation above zero, just as actively as they look to keep it below some maximum rate. so, to state the obvious, the first order of business is : set out to avoid deflation. second, if some deflation occurs unexpectedly, it is not the end of the world. don't panic. but in most countries it would probably signify insufficient aggregate demand relative to supply. demand management policies, if they could not pre - empt this situation, should respond forcefully to it ex post. third, the thing to be avoided most strenuously is a persistent deflation which becomes embodied in expectations. it is in this situation