RBA governor Philip Lowe’s final warning shot

With his future on the line, Philip Lowe says Australia needs fresh investment in homes and factories to cope with record migration.

Philip Lowe says the RBA board is ‘deadly serious’ about returning inflation to its mandated 2 to 3 per cent by the middle of 2025. Picture: NCA NewsWire / Tertius Pickard

Reserve Bank governor Philip Lowe has warned Anthony Albanese, the premiers and big business that they must invest in new housing, infrastructure and ­machinery to cope with the ­nation’s record influx of migrants as he prepares to learn his professional fate within days.

In what is likely to be Dr Lowe’s final public appearance before the Albanese government decides on whether or not to extend his seven-year term, he said the RBA board was “deadly serious” about returning inflation to its mandated 2 to 3 per cent range by the middle of 2025.

The central bank chief, who has attracted the ire of unions, government MPs and borrowers in the months leading up to an all but certain career-ending call by Labor, also declared excessive wage outcomes amid the nation’s declining productivity growth would stoke inflation here and lead to higher interest rates.

“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,” he told the Economic ­Society of Australia in Brisbane.

“We will get inflation back to target, and we’re going a bit slower than others because we want to preserve the gains in the labour market. If it turns out we can’t do that, we will have to take the decision to be tougher.”

In response to a question from The Australian about the expected inflow of 715,000 foreign students, backpackers and skilled workers in the two years to June next year, Dr Lowe said that while some sectors, such as hospitality, are benefiting from an easing of labour shortages, the record population surge is creating stronger competition in housing markets.

“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.

“Population growth brings huge advantages to the country, but we need governments and businesses to keep investing to build a capital stock to support a stronger population.”

Dr Lowe said migration does not have a direct impact on interest rates decisions, but he highlighted the need for more investment in housing, commercial buildings, machinery and equipment and ideas.

“It is a broader issue than just the short-term inflation outlook: it is how we build the capital stock to support a larger or diverse population which I think is in long-term interest,” he said.

Research director at the e61 Institute and former head of structural policy analysis at the OECD Dan Andrews said “Dr Lowe is right to lament Australia’s poor productivity performance but the problem extends well beyond sluggish capital deepening”.

“Our nation’s productivity is being held back by mobility-sapping non-compete clauses, occupational licensing and housing market frictions, which prevent everyday Australians from moving to opportunity,” Mr Andrews said.

After a far-reaching review by an expert panel of the central bank’s performance and mission in April called for the biggest organisational shake-up in 40 years, Dr Lowe also outlined the RBA’s initial response, including the adoption of fewer board meetings, longer policy deliberations and better public communication.

From February, the RBA’s board would meet eight times a year, members would participate in staff meetings, and would explain its decisions through a press conference held by the governor.

“We want the community to understand what we are doing, why we are doing it and the factors we consider in making our decisions,” Dr Lowe said.

“(The changes) will enhance our decision-making and our communication and will help us be the open and dynamic organisation that we aspire to be.”

Rich Insight principal Chris Richardson said the additional communication would be a welcome change to Australian households and businesses, particularly in difficult economic times.

“The test is, does the public understand what the Reserve Bank is thinking, how its views are changing, what that might mean? Because the Bank has never been more important for Australian families and businesses than now,” Mr Richardson said.

“You want to make sure not the right things are said, but the right things are understood.”

Only hours before Dr Lowe’s lunch time address, Jim Chalmers said he was approaching the imminent decision on the RBA governorship “in a methodical and measured and considered and consultative way”.

“This is a decision for the cabinet to take on my recommendation and I take the role of the cabinet and the opinions of my colleagues very seriously,” the Treasurer said, adding he had consulted the opposition, something he was not obliged to do. This is one of the biggest appointments that the government will make. It’s a big job and it’s a big call.”

The RBA governor again said he would be honoured to continue in the role, but told his Brisbane audience he would do his best to support his successor if his term was not extended, as his two immediate predecessors were by Coalition and Labor governments.

At the weekend Dr Chalmers will travel with Dr Lowe to India for a G20 meeting with their counterparts, amid rising global interest rates, weakening growth, sticky inflation and the ongoing security threats and human tragedy due to Russia’s invasion of Ukraine.

Asked about the botched “forward guidance” that alienated the public and harmed the bank’s reputation – when the RBA chief told Australians on several occasions the circumstances for a rise in the near-zero cash rate were unlikely to occur until 2024 at the earliest – Dr Lowe said it was the right thing to do against the backdrop of the pandemic, as certainty was needed at the time.

“What we are trying to do with our communications is to tell people what we are doing, why we are doing it, the facts we are taking into account,” he said.

“During the pandemic, we had a different approach because, at the time, we thought we were in truly dire circumstances. We were explicit about what we thought was the path to interest rates and it turned out we were wrong.”

Independent economist Saul Eslake said changes being embraced to alter the structure of the RBA would bring the central banks in line with practices globally. “When the Monetary Policy Committee is established, there will be more people on the decision-making body who have the experience and the expertise to test and challenge the analysis and recommendations that are put to them by the Reserve Bank staff and the governor, which is best practice,” Mr Eslake said.

Property prices rose each month through the first half of 2023 and are now on track to reach new highs as early as January. Meanwhile, rental markets have demonstrated some signs of easing, however, vacancy rates nationally are less than 1.5 per cent.