RBA governor takes push for government stimulus global with rates warning

RBA governor says central banks risk reigniting housing, stock market bubbles.

Governor of the Australian Reserve Bank Philip Lowe has told a meeting of the world's central bankers that political shocks ‘are turning into economic shocks’.

Reserve Bank of Australia governor Philip Lowe has taken his warning that governments must do more to stimulate the economy onto the global stage, arguing central banks risk reigniting bubbles in house prices and stock markets with ultra-low interest rates.

In an appearance at a meeting of top central bankers in the US overnight, Dr Lowe warned that central banks have limited ability to cushion the global economy against rising headwinds of political uncertainty and trade tensions because interest rates are at, or close to, record low levels.

“We are experiencing a period of major political shocks,” Dr Lowe told a panel at the annual global monetary policy retreat in Jackson Hole, Wyoming, on Saturday afternoon (Sunday morning AEST).

Shares on Wall Street tumbled 2 per cent on Friday after Trump ratcheted up tariffs on China in the latest escalation of the trade war between the two nations. Dr Lowe said central banks would be unlikely to be able to bail out the economy amid the increasing number of political shocks, notably the trade war between China and the US, the impending “no deal” Brexit, political unrest in Hong Kong and further leadership turmoil in Italy.

“Political shocks are turning into economic shocks,” Dr Lowe said, appearing on a panel discussion with Amir Yaron, governor of the Bank of Israel, and Gita Gopinath, chief economist at the International Monetary Fund.

“Monetary policy cannot deliver medium-term growth,” he said, according to reports of his remarks by Bloomberg. “We risk just pushing up asset prices.”

The RBA recently cut Australia’s cash rate for the second time in as many months to a record low of 1 per cent in July. Many economists and analysts expect the RBA to slash the cash rate to as low as 0.5 per cent by the start of next year to combat a stagnating local economy and rising unemployment amid the global trade jitters.

Dr Lowe told the Jackson Hole conference that infrastructure investment and structural reform in economies around the world would have much greater impact than cutting interest rates.

But he warned politicians were reluctant to act.

“With these three levers stuck, the challenge we face is monetary policy is carrying too much of a burden,” Dr Lowe said.

The RBA boss has repeatedly urged Canberra and the state governments to spend more on infrastructure projects to help stimulate the economy and increase productivity, and called on all levels of government to embark on productivity-enhancing reform of tax and investment policy.

A landmark audit by the independent agency Infrastructure Australia last week warned a $200 billion investment pipeline in major projects over the next five years must be replicated on a rolling basis for the next 15 years and beyond to prevent living standards going backwards.

While Scott Morrison has pledged a $100bn program over the next decade, just a third of the $30bn worth of new spending announced in this year’s federal budget was due to be spent over the next four years, and spending will not peak until 2024.

Dr Lowe has urged increased spending on public works to stimulate the economy, while Australian Industry Group chief Innes Willox has warned a skills shortage is threatening the delivery of the unprecedented pipeline of infrastructure projects.

The Morrison government has sought to pour cold water on Dr Lowe’s calls for further spending. In a recent appearance before a parliamentary committee, Dr Lowe said there were “some capacity constraints” in some parts of the infrastructure sector, “but these should not prevent us from looking for opportunities to boost the economy’s productive capacity and support domestic demand and there’s no shortage of finance to do this, with interest rates the lowest they’ve ever been”.

He conceded there was “limited scope” to launch “another mega-project” and it was the responsibility of state governments to manage the pipeline of continual investment in infrastructure.