RBA Governor: Still a long way to go
Reserve Bank Governor speech

Speech by Reserve Bank Governor: Governor Philip Lowe presented a speech: “The Recovery, Investment and Monetary Policy”.

In the speech the Governor covered a lot of ground but emphasised that wage and price growth and the unemployment rate were still a long way from desired levels.

What does it all mean?

• Recent data has been unambiguously positive. While good news for Australian businesses and families, it is important to guard against complacency. The Reserve Bank Governor emphasised this point, noting that the road to “normality” was long. Governor Lowe said that wage growth was a long way from 3 per cent. And indeed inflation was a long way from sustainably being back in the 2-3 per cent target band.

• The Governor sought to emphasise that he believes that rising bond yields are sending false signals on the inflation risk and the potential for a lift in the cash rate: “market pricing has implied an expectation of possible increases in the cash rate as early as late next year and then again in 2023. This is not an expectation that we share.”

• The Governor also gave a veiled warning on soaring home prices, highlighting the slowest population growth in a century, “…history suggests that shifts in population growth can have large effects on the housing market.”

What do you need to know?

Speech by Reserve Bank Governor: “The Recovery, Investment and Monetary Policy”

• Global economy: “The rapid development of vaccines and their rollout have improved the global outlook and lessened some of the downside risks. The plan for further fiscal stimulus in the United States has also improved growth prospects there.”

• Monetary policy: “The Reserve Bank is committed to continuing to provide the necessary assistance and will maintain stimulatory monetary conditions for as long as is necessary. We want to see a return to full employment in Australia and inflation sustainably within the 2 to 3 per cent target range. These are our goals and we are committed to achieving them.”

• Cash rate target: “An important element of our policy package is the cash rate target being set at what is the effective lower bound of 0.1 per cent. The Board will maintain this setting of the cash rate target until inflation is sustainably within the 2–3 per cent range. It is not enough for inflation to be forecast to be in this range. Before we adjust the cash rate, we want to see actual inflation outcomes in the target range and be confident that they will stay there.”

• Rising bond yields: “…over the past couple of weeks market pricing has implied an expectation of possible increases in the cash rate as early as late next year and then again in 2023. This is not an expectation that we share.”

• Wages: …”we are a long way from a world in which wages growth is running at 3 per cent plus.” “The point I want to emphasise is that for inflation to be sustainably within the 2–3 per cent target range, wages growth needs to be materially higher than it is currently.”

• Full employment: “…it is certainly possible that Australia can achieve and sustain an unemployment rate in the low 4s.” “As we progress towards full employment, we will be relying on the wages and prices data to provide a signal as to how close we are. The current signal is that we are still a long way away from full employment.”

• Home prices: “…we are continuing to pay close attention to lending standards, especially given the combination of low interest rates and rising housing prices. Looser standards would increase medium-term risks and add to the upward pressure on prices, so would be of concern. Reflecting this, the Council of Financial Regulators has indicated that it would consider possible responses should lending standards deteriorate and financial risks increase. We are not at this point, but we are watching carefully.”

• Investment: “The full recovery of our economy requires a further lift in business investment. Stronger investment will also boost our productivity and provide a firm basis for stronger growth in nominal and real wages.”

• Australian dollar: The Governor said he would be more comfortable if the dollar was lower than current levels near US77 cents.

What is the importance of the economic data?

• Speeches from the Reserve Bank Governor influence financial markets and provides guidance on the economy for investors and businesses.

What are the implications for investors?

• The Governor was at pains to highlight that the economic recovery has a long way to go. As such, stimulatory monetary policy needs to be maintained. The Governor reiterated that the cash rate will remain at current levels until at least 2024.

• The Reserve Bank Governor indicated that he‘s “carefully” watching developments in the housing market. While ruling out the use of monetary policy to slow housing demand, Governor Lowe indicated that the focus was very much on lending standards.

Published by Craig James, Chief Economist, CommSec