Lowe’s sensible advice on investment, productivity

In his address to the Economic Society of Australia in Brisbane on Wednesday, Reserve Bank of Australia governor Philip Lowe reiterated he would be honoured to continue in the position if invited by the Albanese government. He also backed the government’s independent review of the central bank. The RBA was highly regarded internationally, he said. “But as times change, we too need to change,” he added.

“The world we face is increasingly complex and it is right to re-examine how we make and communicate monetary policy decisions and how the RBA is managed. The board and the bank’s staff have supported the review, and we have been working constructively on the recommendations.”

It is not clear whether Dr Lowe will know his fate when he and Jim Chalmers travel to India together next week, along with one of the contenders for the job, Treasury secretary Steven Kennedy, for G20 finance ministers and central bank governors summits. In what was probably his final speech before cabinet makes its decision, Dr Lowe focused on complex cross-currents facing the economy as the bank sets about achieving its major goal: to bring inflation down to its target range of 2 to 3 per cent.

Pricing pressures were coming from several factors, he said, such as the high level of capacity utilisation, strong growth in unit labour costs (due to weak productivity growth), a rise in rents, and higher electricity prices. On the other hand, Dr Lowe said, factors contributing to the easing of inflation included an easing of Covid supply chain disruptions, a decline in commodity prices in global markets, and slow growth in demand, especially in household consumption. The last, he said, was expected to lead to a rise in unemployment and a moderation in growth in unit labour costs. Amid the competing factors, the board decided last week to hold interest rates steady at 4.1 per cent this month and re-examine the situation next month, Dr Lowe said. It was possible, he warned, that some further tightening would be required to return inflation to target within a reasonable timeframe.

The bank’s most recent forecasts, prepared in early May, he said, had inflation returning to the top of the target band of between 2 and 3 per cent in mid-2025.

Australia was going a bit slower than some other countries at returning inflation to target, he said, “because we want to preserve the gains in the labour market”. But, he said, “if it turns out we can’t do that, we will have to take the decision to be tougher … If we saw Australia in the same situation as in the US, Canada and UK where wages are growing at 6 per cent, that would have implications for our setting of monetary policy.”

In response to a question from The Australian about the influx of 715,000 foreign students, backpackers and skilled workers in the two years to June next year, Dr Lowe warned Anthony Albanese, premiers and big business that they needed to invest in new housing, infrastructure and machinery to cope with such population growth. “All these people coming in have to live somewhere,” he said. “That is pushing up rents and housing prices. We thought housing prices would continue to decline this year but they are not; in Sydney they are rising quite strongly again, and that is partly due to the influx of immigration … If we’re going to have a lot more people in the country, which is good, we need the capital stock to support those people, otherwise the capital-labour ratio declines – and that is bad for productivity.”

Under Dr Lowe the RBA has made mistakes, notably in forecasting that interest rates would remain low until next year. Instead, the bank has lifted them 12 times in just over a year as it has struggled to control inflation. At the same time, his advice on tying wage rises to productivity gains, which has drawn the ire of unions, is the kind of independent advice the government needs.