Lowe’s final message before leaving Reserve Bank

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Inflation is likely to swing more wildly in coming years as the economy faces growing risks from demographics to climate change, Reserve Bank governor Philip Lowe has warned.

In his last speech before his seven-year term heading the central bank ends, Lowe conceded the bank pumped too much stimulus into the economy during the depths of the COVID-19 pandemic.

Outgoing RBA governor Philip Lowe says trying to keep inflation in a narrow band will become more difficult.Credit: Louise Kennerley

He also used the address in Sydney on Thursday to argue that high house prices across Australia had become a social and economic problem.

The Reserve Bank aims to keep inflation between 2 and 3 per cent. Lowe said during his term, it had averaged 3 per cent, swinging between a low of minus 0.3 per cent during the depths of the pandemic and 7.8 per cent late last year.

Lowe warned it would become increasingly difficult to hit the inflation target.

“My view is that it will be difficult to return to the earlier world in which inflation tracked in a very narrow range,” he said.

“The increased prevalence of supply shocks, deglobalisation, climate change, the energy transition and shifts in demographics mean either steeper supply curves or more variable supply curves.

“While this doesn’t mean that the inflation target can’t be achieved on average, it does mean that inflation is likely to be more variable around that target.”

Lowe said the issue that had defined his term more than any other was his comments about the timing of the first increase in official interest rates. As late as the end of 2021, Lowe said publicly that rates were unlikely to start being increased from their low of 0.1 per cent until 2024.

The RBA started lifting rates in May 2022.

Lowe argued his comments were interpreted as a commitment rather than as a conditional statement, adding that at the time there were real worries of unemployment climbing as high as 15 per cent and a deep recession.

But he conceded the bank, which apart from cutting interest rates also injected hundreds of billions of dollars into the economy as part of its quantitative easing program, had done too much.

“With the benefit of hindsight, my view is that we did do too much. But hindsight is a wonderful thing,” he said.

“None of us can predict the future and we have had to make decisions under great uncertainty and with incomplete information. We got some things right, but we got other things wrong.”

Lowe argued that while interest rates influenced house prices, they were not the reason Australia had some of the highest priced housing in the world.

He said Australia’s interest rate settings over recent years were similar to those in other countries. House prices here had been largely affected by other issues and reflected Australians’ own choices.

“It is the outcome of the choices we have made as a society – choices about where we live, how we design our cities, and zone and regulate urban land, how we invest in and design transport systems, and how we tax land and housing investment,” he said.

“In each of these areas, our society and politicians have made choices that lead to high urban land and housing costs. It is by tackling these issues that we can address the high cost of housing in Australia, which I view as a serious economic and social problem.”

Lowe also used the speech to suggest there might be new ways for governments to deal with the economy that would take some pressure off the Reserve Bank.

Removing some powers of the government over public spending could help deal with emerging economic issues with which the use of interest rates alone might struggle, he said.

“Fiscal policy could provide a stronger helping hand, although this would require some rethinking of the existing policy architecture.

“In particular, it would require making some fiscal instruments more nimble, strengthening the (semi) automatic stabilisers and giving an independent body limited control over some fiscal
instruments.”

Lowe will hand the Reserve Bank’s top job to his deputy, Michele Bullock, on September 18.

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