investor daily logo

Government must work with RBA for prosperity

By Eliot Hastie
 — 1 minute read

The governor of the RBA has said that the central bank is open to cutting rates again, but the government has to do its part to promote economic prosperity.

At a speech to the CEDA in Adelaide, governor Philip Lowe said that the economy still had significant capacity and the option to cut rates was still on the table. 

“It is not unrealistic to expect a further reduction in the cash rate as the [RBA] board seeks to wind back spare capacity in the economy and deliver inflation outcomes in line with the medium-term target,” he said. 


However, Mr Lowe said the RBA could not do the work to ensure economic prosperity alone and it required the government’s help. 

“It is important though to recognise that monetary policy is not the only option, and there are limitations to what can be achieved. As a country, we should also be looking at other ways to get closer to full employment,” he said. 

Monetary policy was one measure and the RBA’s decision had shown it would assist that, but the government needed to consider both fiscal and structural policies to maximise prosperity. 

“One option is fiscal policy, including through spending on infrastructure. Another is structural policies that support firms expanding, investing, innovating and employing people,” Mr Lowe said. 

“Both of these options need to be kept in mind as the various arms of public policy seek to maximise the economic prosperity of the people of Australia.”

Earlier this month, the RBA cut rates to record lows after two and a half years, making the official rate 1.25 per cent. 

Mr Lowe said the decision was not in response to a deterioration but rather a judgement that Australia could do better. 

“The Australian economy can sustain a higher rate of employment growth and a lower unemployment rate than previously thought likely. Most indicators suggest that there is still a fair degree of spare capacity in the economy.” 

One of the indicators was in the unemployment data, but conventional estimates of that were no longer sufficient. 

“The fact that the conventional estimate of spare capacity is based on the unemployment rate reflects an implicit assumption that, if you have a job, you are pretty much fully employed. In decades past, this might have been a reasonable assumption. But it is not a realistic assumption in today’s modern flexible labour market,” Mr Lowe said. 

The thinking on employment had to change to reflect part-time and full-time work, and underemployment measures had to be considered when assessing spare capacity, Mr Lowe said. 

“Unlike the unemployment rate, which has trended down over the past 20 years, the underemployment rate has been relatively stable,” the RBA governor said.

“These different patterns in unemployment and underemployment suggest that fewer inroads have been made into spare capacity in the labour market than suggested by looking at the unemployment rate alone.”

The second indicator for spare capacity was in labour supply, which was still flexible in Australia due to female and older Australia participation and migrants, Mr Lowe said. 

“This rise in participation is a positive development. But it is one of the factors that has meant that strong demand for labour has not put much upward pressure on wages,” he said. 

The third indicator was the people looking for jobs were matched with the jobs that are available, which looked a little tighter, Mr Lowe said. 

“At present, there are fewer than three unemployed people for each vacancy. This compares with over 20 people for every vacancy in the early 1990s recession and five people for every vacancy in 2014. From this perspective, the labour market looks reasonably tight,” he said. 

Lastly, Mr Lowe said wages growth had only had a modest increase and was below the comfortable rate. 

“Wages growth remains modest and is below the rate that would ensure that inflation is comfortably within the 2 to 3 per cent range,” he said.

Government must work with RBA for prosperity

The governor of the RBA has said that the central bank is open to cutting rates again, but the government has to do its part to promote economic prosperity.

investordaily image
investordaily image
ID logo

related articles

Website Notifications

Get notifications in real-time for staying up to date with content that matters to you.