Reserve Bank Governor Phillip Lowe has urged businesses and investors to remain confident inflation will rise in Australia in the years ahead, albeit gradually, as the investment boom gathers momentum.
Dr Lowe reiterated Australia’s economy is “moving in the right direction” and said growth will be stronger in 2018 than in 2017 on the back of improvements in wage growth and lower unemployment.
The comments come a day after the RBA left its official cash rate steady at a record low of 1.5 per cent for the 19th consecutive month.
“Investors should have confidence that, over time, CPI inflation in Australia will average between two and three per cent,” he said.
“They can expect some variation from year to year, but over the medium term the average inflation rate will be two point something.
Dr Lowe said with interest rates still quite low, it is likely that the next move in interest rates will “be up, not down”, but again warned it isn’t in the near term.
“The board does not see a strong case for a near-term adjustment of monetary policy,” he said.
During his talk about the changing nature of investment, Dr Lowe revealed non-mining investment had recorded its largest increase since the onset of the global financial crisis in the past year, and predicted further growth in the months ahead.
The RBA estimates non-mining investment – such as manufacturing, transport, education, health and technology – to have increased by about nine per cent in the past year, driven by low borrowing costs and a stronger global economy, which has boosted demand and reduced business uncertainty.
Mr Lowe said Australia’s ongoing strong population growth and stronger business conditions have also played a significant role in the investment boom which has previously been dominated by the resources sector.
“While businesses still face some significant uncertainties, including the future strength of consumer spending in a world of low real income growth and high household debt, the picture is a better one than it has been for some time,” Dr Lowe told a business conference in Sydney on Wednesday.
The focus on investing in technology has also increased in recent years, with data showing investment in intellectual property growing at a faster rate than investment in buildings and structures and machinery and equipment over the past couple of decades, he said.
The strongest growth has been in investment in software, which has doubled over the past seven years.
“In every industry – in manufacturing, mining, agriculture, the health sector and business services – businesses are having to make investments in information technology to remain competitive,” Dr Lowe said.
“This is changing the way we think about investment.”