philip lowe : australia and the world address by mr philip lowe, deputy governor of the reserve bank of australia, at the commonwealth bank australasian fixed income conference dinner, sydney, 30 october 2012. * * * i would like to thank tom rosewall for his valuable assistance in the preparation of this talk. thank you very much for the invitation to join you tonight. it is a pleasure to be here. this evening i would like to talk about some developments in the international economy and their implications for australia. clearly, this is not a new topic. developments abroad have long had a profound impact on the australian economy and financial markets, and, no doubt, they will continue to do so. but the unusual nature of recent developments, particularly in the advanced economies, is changing the way in which global outcomes affect australia. i would like to spend some time this evening talking about these changes. it is useful to start off with the “ big picture ” and the key global influences on the australian economy over recent times. here, i would point to just two. the first is very much a positive influence – that is, the strong growth over a number of years in many emerging market economies, particularly those in asia. the second is a negative influence – that is, the fiscal, household balance sheet and banking problems in many of the world ’ s advanced industrialised countries. together, these two influences are reshaping the contours of the global economic landscape. they are also changing the configuration of interest rates and exchange rates we are seeing in australia. the asian story and its implications for us are well known. the strong growth in the region has led to a marked increase in the prices of resources and agricultural commodities, relative to the price of manufactured goods. this has been to our considerable advantage, given our natural resource base and our stable investment climate. it has meant that at a time when many of the advanced economies have been experiencing what is close to an investment drought, australia has had the highest level of investment, relative to gdp, in over a century, and a further increase is expected ( graph 1 ). while the growth in asia is clearly a positive story for australia, there are inevitably ups and downs in the region and these are having a bigger influence on the australian economy than was previously the case. reflecting this, we have recently seen chinese economic data being discussed much more in australia than they were just a short time ago. earlier in the year, growth in china was slowing, but

- century investment boom. the economy has recorded solid growth, the unemployment rate remains relatively low, inflation is consistent with the target, public debt is low and the banking system is sound. few countries can make such claims. the second is that the types of portfolio flows i talked about earlier do appear to be having an effect here. this effect is perhaps clearest in the government bond market, with yields near historic lows. but it is also evident in the credit markets, with credit spreads paid by banks having fallen recently. it is also likely that these portfolio flows help explain why the exchange rate has changed little since mid year despite a general softening of the global outlook and a decline in key export prices. the third point is that australia ’ s interest rates remain above those in other developed economies. the main reason for this is that the rate of return on new investment in australia is higher than in many other countries, as evidenced by the high level of investment. the very low interest rates in many other economies should not be seen as a good thing or something to aspire to. they reflect those countries ’ difficult economic circumstances, and particularly the low risk - adjusted returns available on new investment. bis central bankers ’ speeches the fourth and final point is that while our interest rates are relatively high compared with other countries, they are relatively low compared with historical averages. the international connections that i have talked about tonight help to explain this. these lower - than - average interest rates are providing some support to demand in the economy. there is also some sign that they have led to a slight improvement in the property market, although there has been little change in the appetite for debt. it would appear that, for the moment at least, the lower interest rates, rather than encouraging household borrowing, have allowed many households with mortgages to repay their loans slightly more quickly than was previously the case. these trends will obviously need close monitoring over the period ahead. so to conclude. these competing influences from asia and the troubled advanced economies are having a significant effect on the australian economy, the exchange rate and interest rates. they are creating challenges for both policymakers and investors, and they have added to the sense of uncertainty. what seems clearer though is that australia ’ s strong trade links with asia, our solid financial system, our flexible markets and our credible policy framework mean that we are in a better position than many other countries to deal with these challenges. i wish you the best of luck as you navigate your way through this