‘Political shocks turn into economic shocks’: RBA chief

Philip Lowe has warned we are living in an era where political shocks can cause economic waves.

Governor of the Australian Reserve Bank Philip Lowe ... “Political shocks are turning into economic shocks.” Picture: AAP

RBA governor Philip Lowe says the world has entered a new era in which “political shocks” are becoming “economic shocks” and record low interest rates risk creating housing and stockmarket price bubbles.

Dr Lowe also restated his call for governments to do more to stimulate the economy, given the limited capacity of central banks to cushion the global economy in an environment of ultra-low interest rates.

“We are experiencing a period of major political shocks,” Dr Lowe told the annual global monetary policy retreat in Jackson Hole, Wyoming, yesterday.

“Political shocks are turning into economic shocks.”

The conference draws the world’s most senior economists and central bankers. Dr Lowe called on governments to overhaul their economies, arguing that infrastructure investment and structural reform would have a greater impact than cutting interest rates. He identified the reluctance of politicians to act as a key problem.

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

“With these levers (of infrastructure spending and structural reform) stuck, the challenge we face is that monetary policy is carrying too much of a burden.”

The Australian sharemarket is expected to fall this morning following a slide on Wall Street on Friday, where stocks slid by 2 per cent after US President Donald Trump ratcheted up tariffs on China in the latest trade war escalation.

Dr Lowe said central banks were unlikely to be able to bail out the economy as they did during­ the global financial crisis, amid the increasing number of shocks such as the trade war between­ China and the US, the impending “no-deal” Brexit, polit­ical unrest in Hong Kong and ­further leadership turmoil in Italy.

Josh Frydenberg said yesterday the government would take the “necessary actions” to ensure the economy continued to grow.

“We believe we have the right set of policies to see Australia through these challenging times, including the most significant tax reforms in over a decade, record job creation and record infrastructure spending, all while returning the budget to surplus for the first time in more than a decade,” the Treasurer said.

Last month, the RBA cut Aust­ralia’s cash rate for the second time in as many months, to a recor­d 1 per cent low.

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.

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

Dr Lowe’s comments came as Bank of England governor Mark Carney said trade tensions were harming business confidence and leading to a visible pullback in investme­nt that could eventually spark job losses.

Dr Carney — whose term as the head of Britain’s central bank ends in January — singled out the US and its trade wars as respons­ible for the weakening global economy: “When we trace it, it’s not because of (US Federal Res­erve) policy. It’s not because of global financial conditions. It’s not because of Chinese deleveraging.”

He said the one factor driving the latest economic slowdown “is a trade war”. “Certainly the US is involved in the theatres — all of the theatres — in this war.”

As interest rates inch closer to zero, the Reserve Bank board has been forced to consider “un­conventional” measures to pump more money into the economy.

According to the minutes from its most recent board meeting, the RBA board has examined a range of crisis responses, such as pushing the official cash rate into negative territory, flagging the timing of further interest rate cuts, a massive purchase of government bonds (quantitative easing), ­giving the banking sector a free kick by funding lenders at discounted rates, or forcing the dollar lower.

Opposition Treasury spokesman Jim Chalmers said yesterday the Morrison government had “no plan” to turn the economy around. “The (RBA) governor ­understands what the government does not — that the lowest interest rates in our history are not enough on their own to get the economy moving again and that the Reserve Bank can’t do all the heavy lifting on its own,” Dr Chalmers said.

The federal government has sought to pour cold water on Dr Lowe’s calls for infrastructure spending, enlisting the help of the Treasury Department to explain the bottleneck of large projects and a lack of resources and skills to roll out large public works.

However, a landmark audit by independent agency Infrastructure Australia warned this month that 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.

With Dow Jones Newswires