‘It’s not interest rates’: Former RBA governor Philip Lowe’s cost of living call

Decade-high interest rates are not “the source” of Australia’s cost of living problem, former Reserve Bank governor Philip Lowe has said.

Decade-high interest rates are not blame for Australia’s cost of living problem, former Reserve Bank governor Philip Lowe has said.

In an interview with The Australian – a fortnight after the RBA cut interest rates for the first time since November 2020, to 4.1 per cent – Dr Lowe said lack of productivity growth is instead “the source” of the ongoing crisis.

“It’s not interest rates. Interest rates have probably suppressed aggregate demand by 1 per cent this year,” Dr Lowe said.

“The lack of productivity over that time has suppressed demand now by 9 per cent (today). So that’s the source of the problem.”

Australia’s productivity problem is “political” rather than economic, Dr Lowe continued, “and we’ve got to do something about that”.

“We’ve had our living standards rising quickly for decades, and that’s no longer happening, and people are getting unhappy about it,” he said.

Former Reserve Bank governor Philip Lowe said interest rates are not ‘the source’ of Australia’s cost of living problem. Picture: NCA NewsWire/Nikki Short

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“The problem isn’t an economic one, we kind of know broadly what to do.

“It’s a political one – our society has lost the ability to form coalitions to implement difficult things that in the short run will hurt some people, but are good for our kids. And we’re now seeing the consequences.”

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Late last year Federal Treasurer Jim Chalmers announced a $900 million fund, pitching state against state in an effort to boost the nation’s lagging productivity levels – though said it would take time to turn things around.

“Our productivity problem didn’t show up two years ago, it showed up two decades ago,” Dr Chalmers told a meeting of the Australian Business Economists in November.

“And not just in Australia but in almost every comparable country. The Productivity Commissions’ five-yearly review of our productivity performance was clear.

“Growth in the last full decade was the slowest in 60 years.”

The policy will allow states and territories to access funding from a “menu” of approved projects, including funding to help streamline commercial planning and zoning provisions, or making it easier for developers to use modern construction methods.

Both tactics could boost housing supply and supercharge the building industry which has been hit by labour shortages and the increased cost of materials.

Federal Treasurer Jim Chalmers announced a $900 million fund to boost Australia’s lagging productivity in November. Picture: NewsWire/Martin Ollman

“This will incentivise states to achieve productivity gains through pro-competitive policies, choosing from a menu of options,” Dr Chalmers said.

“It’s all about rewarding states with more revenue, where they deliver meaningful and measurable economic reforms.”

Like her predecessor, Reserve Bank governor Michele Bullock has also been critical of the nation’s slow productivity, saying it’s directly correlated with improving living standards for Australians.

“It grows the pie so there’s more of it to share around, and it’s important for inflation in the sense that if we’re not getting productivity growth then that limits how far wages can rise or how quickly wages can rise without causing inflation,” Ms Bullock said in November.

“So it has implications for wage rises for people. That’s why it’s important.”

Productivity growth ‘has implications for wage rises for people’, Reserve Bank governor Michele Bullock said. Picture: NewsWire/Gaye Gerard

Dr Chalmers told Sky News on Sunday the Labor government is preparing to deliver its budget for the end of this month, as speculation grows over when Prime Minister Anthony Albanese will call the federal election.

Though the Treasurer stayed mum on when that will be – saying an announcement will be made “in due course” – he said that his “job isn’t to focus on that”.

“My job is to work with (Finance Minister) Katy (Gallagher) to put that budget together. It’ll be another responsible budget just like the first three,” Dr Chalmers said.

“We’ll help with the cost of living where we can do that in an affordable way, we’ll keep fighting inflation, we’ll keep trying to make our economy more productive and dynamic, and we’ll build Australia’s future,” Dr Chalmers told Sky News.