RBA governor Philip Lowe tells business to scrap ‘outdated’ plans to lift growth

Philip Lowe urges business to pour money into projects with long term pay-offs to help spark growth.

Reserve Bank Governor Philip Lowe. Picture: Kym Smith

Reserve Bank governor Philip Lowe has urged Australian businesses to scrap outdated “hurdle” rates of profitability that guide investment plans and instead pour money into projects with “really long term pay-offs” to help reignite weak economic growth.

Delivering the Sir Leslie Melville Lecture in Canberra on Tuesday, Dr Lowe also batted away political pressure on the central bank to stop its campaign of official cash rate reductions, arguing the RBA was still “prepared” to cut interest rates to stop rising unemployment and kickstart wages growth.

He said it was up to global governments and Canberra to arrest the increase in international trade tensions and improve the environment for business investment so that interest rates could return to more normal levels.

Dr Lowe also defended the RBA’s current inflation target, which is the subject of a government review amid calls for the mandate to be lowered after several years of inflation running below its 2 to 3 per cent band, arguing a sole focus on returning the consumer price index to 2 per cent over the short-term would not be the best way to serve the Australian economy.

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“That’s not to say inflation control is unimportant – because it clearly is important. Rather, we need to remember that it is a means to an end, and that end is welfare maximisation,” Dr Lowe said.

According to the RBA’s business liaison program, the central bank has been told that “some companies” have lowered their hurdle rates to return as interest rates have slid to record-low levels and reduced borrowing costs, allowing corporations to green-light investment plans that would have been considered not profitable enough in a higher interest rate environment.

The longstanding “norm” for hurdle rates has been between 13 and 14 per cent, which Dr Lowe said was “hardwired into the corporate culture in some companies” despite borrowing costs for funding new projects plunging to record-low levels.

“In some cases, hurdle rates of return are too sticky,” Dr Lowe said.

“Changing this hardwiring is difficult and time consuming,” he said. “However, from our liaison with Australian companies, we do know that some companies have lowered their hurdle rates and this is opening up new opportunities for them. It would be good to hear more such reports.”

“At low interest rates, many investments that didn’t make sense at higher interest rates should now make sense. Future returns no longer need to be discounted as highly. This means that low interest rates give us the opportunity to lengthen our horizons and think about projects with really long-term pay-offs,” Dr Lowe said.

Josh Frydenberg in August issued a rallying call to company bosses to ­invest more in new technologies – rather than returning excess cash to shareholders – in a bid to kickstart flagging productivity and boost wages. According to Treasury research, about 95 per cent of Australian companies have “barely” improved their productivity over the past 15 years, due to companies failing to adopt new technologies or invest in their businesses amid a shift to the less productive “services” economy.

Australia’s productivity rate has plunged from an average of about 2.5 per cent in the 1990s to about 1.1 per cent in recent years, contributing to weak wages growth and tepid economic activity which threatens the viability of the nation’s generous tax and transfer system that underpins the social welfare net.

This week, Liberal MP Tim Wilson, chair of the House of Representatives economics committee, called on the RBA to “press pause” on further rate cuts after finding that fewer than 7 per cent of mortgage borrowers were reducing their monthly mortgage repayments in the wake of the central bank slashing the cash rate from 1.5 to 0.75 per cent between June and October.

While many economists believe the RBA could cut rates as low as 0.25 per cent and unleash a quantitative easing-style bond buying program to lower bank funding costs, Dr Lowe said rate cuts were “supporting the gentle turning point in economic growth” and “supporting jobs and overall income growth”.

Without following global central banks cutting interest rates lower, Dr Lowe warned the Australian dollar would rise and harm exports.

“The key to a return to more normal interest rates globally is to improve the investment climate,” he said. Dr Lowe said this was by, first, lowering concerns around geopolitical risks and, second, by embarking on structural reform to help business “expand, invest and innovate”.

“Both elements are largely beyond the control of central banks. They are a matter for government and for business,” he said.

“The Board is prepared to ease monetary policy further if needed. It is likely though that we will require an extended period of low interest rates to reach full employment and for inflation to be consistent with the target.”