Reserve Bank Governor testifies to Parliament
Testimony to Parliament

Reserve Bank Governor Testimony: Reserve Bank Governor Philip Lowe spoke to the House of Representatives Economics Committee.

What did he say and what does it all mean?

• This week the Reserve Bank handed down its monetary policy decision; the Governor delivered a speech; the Governor delivered testimony to Parliament; and the Statement on Monetary Policy will be issued. It is clear that the fundamental aim of the Bank is to boost economic activity, create jobs, and lift wages and inflation.


Key points from Opening Statement:

• Global economy: “On the negative side, renewed outbreaks of the virus late last year have interrupted the economic recoveries in many countries.”

• On the positive side, I would like to point to 2 factors.

• The first is there has been a strong rebound in global trade in goods – as people have switched from consuming services to goods, production and international trade in goods has picked up. This, together with the continuing strong recovery of the Chinese economy, has boosted many commodity prices and Australia’s terms of trade. The more important piece of positive news is the development of vaccines.

• Australia: Since we last met, the outlook for the Australian economy has also improved. The downturn in Australia was not as deep as we had feared and the recovery started earlier and has been stronger than we were expecting. The outcomes for GDP and the labour market have been at least as good as the upside scenarios we published last year. Employment growth, retail sales and new house building have all been strong and measures of consumer and business confidence have also improved. This does not disguise the fact that we still have a fair way to go.

• Central scenario: Our central scenario is for the upswing in the Australian economy to continue, with above-trend growth over the next couple of years. GDP is expected to increase by 3½ per cent over both this year and 2022. Taking into account the recovery so far, we are expecting the level of GDP to return to its end-2019 level by the middle of this year, which is 6 to 12 months earlier than we previously expected.

• Unemployment: In our central scenario, the unemployment rate continues to decline to reach 6 per cent by the end of this year and around 5¼ per cent by mid-2023. When the JobKeeper program finishes at the end of March, we expect some additional job losses. But, over time, these are expected to be offset by the jobs created by the ongoing economic recovery. Job vacancies, job ads and business hiring intentions have all rebounded sharply, which suggests continuing solid employment growth over the next few months.

• Wages & prices: Wages growth and inflation are both forecast to remain subdued. Wages growth is expected to pick up from its current low rate, but to do so only very gradually and still be below 2 per cent at the end of next year. Inflation in underlying terms is also forecast to stay below 2 per cent over the next couple of years: the central forecast for 2021 is 1¼ per cent and for 2022 it is 1½ per cent.

• Housing: here are many moving parts here at present: record low interest rates; a shift in preferences towards houses and regional locations; large government incentives for first home buyers; the slowest population growth in a century; very high rates of house building; and a decline in apartment rents in Sydney and Melbourne.

• Housing prices: As we have previously discussed at these hearings, the RBA does not – and should not – target housing prices. Instead our focus is on the lending that is used to purchase housing. We want to see lending standards remain strong. At present, there are few signs of a deterioration in these standards. If that were to change, you could expect that we would be discussing possible responses at the Council of Financial Regulators, as we did a few years ago.

• Six points on Monetary Policy

• The RBA’s monetary policy package is working broadly as expected and it is helping to support jobs.

• The second point is that very significant monetary support will need to be maintained in Australia for some time to come.

• The third point is that as part of the RBA’s ongoing monetary support, we will continue to purchase bonds issued by the Australian Government and the states and territories at the completion of the current $100 billion program in mid-April.

• The fourth point from the Board’s review this week is that the Term Funding Facility will be maintained as it is.

• The fifth point is that the 3-year yield target for Australian Government bonds will be maintained.

• The sixth and final point is that the cash rate will be maintained at 10 basis points for as long as is necessary. The Board has no appetite to go into negative territory and has done as much as it reasonably can with interest rates.
Question & answers:

• How sustainable is low interest rates? It reflects global factors.

• How do we increase business investment? Getting the economy moving and focus on areas where returns are high: energy, digital economy, health & care.

• How much control do we have on our interest rates and our currency: There have been huge shifts in world equilibrium interest rates? No signs that other countries are manipulating their currencies.

• Aussie dollar: The Aussie dollar hasn’t risen as high as would be expected with higher commodity prices – reflects monetary policy easing.

• Rates unchanged to 2024: It is possible that we could do better than the central scenario. Could do better than the upside scenario – but Governor Lowe sees this as unlikely.

• Undershoot of inflation target: Board has been doing all that is possible to lift inflation to target band.

• JobKeeper: Governor Lowe welcomes the program (“incredibly important”) and welcomes that it is temporary.

• Share prices – integrity in valuations: Aussie sharemarket only back to levels a year ago and only near levels seen 14 years ago.

• Asset prices: “I don’t see particular concerns about valuation of assets”. Shouldn’t attempt to control assets prices – and it may not be possible to even try.

• Would a greater lift in bond purchases from $100 billion to $200 billion boost inflation: It is possible. Also possible it would lead to no change.

• Has the Bank considered issuing 30-50 year bonds: We already have 20-year bonds and AOFM moving to longer-term maturities

• US Federal Reserve view of tolerating inflation above 3 per cent: Premature to talk about rates above 3 per cent.

• Questions on external RBA appointments and internal RBA debate on policies; Reserve Bank accountability; options for interest rate target; bond purchases & interest rates; bitcoin; bank notes; credit card rates.

What is the importance of the testimony?

• The Reserve Bank Governor delivers testimony to the House of Representatives Economics Committee every six months. The testimony enables investors to have more insights on the economy and the operation of monetary policy
What are the implications for interest rates and investors?

• Low rates will be with us for quite some time. The Reserve Bank is focused on whether more stimulus is required to support job creation, while driving up inflation and wages.


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Published by Craig James, Chief Economist, CommSec