The Reserve Bank of Australia has pointed to Australia’s high debt levels as a factor in its decision making for the cash rate, fearing that it will make the economy more vulnerable to shocks.
The RBA published its four-year corporate plan on Friday, pointing to the banks’ exposure to housing loans and cyber security in financial institutions as the largest risks to the country’s financial stability.
In Australia, wages growth is low, reflecting spare capacity in the labour market as well as some structural factors.
The central bank expects the unemployment rate will remain around 5.25 per cent for a time, before declining to around 5 per cent in 2021, with wages growth expected to remain stable and then increase modestly from 2020.
Consumer price inflation is forecast to increase to be a little under 2 per cent over 2020 and a little above 2 per cent over 2021.
The RBA noted over the next four years, “movements in asset values and leverage may be more important for economic developments than in the past given the already high levels of debt on household balance sheets.
“Especially in the context of weak growth in household income, high debt levels could complicate future monetary policy decisions by making the economy less resilient to shocks,” the RBA said.
The central bank noted policymakers in the US and other countries employing quantitative easing as a result of intensifying trade and technology disputes.
Globally, the RBA reported, labour market conditions remain tight in major advanced economies, although unemployment rates are at multidecade lows.
“Global interest rates and measures of financial market volatility both remain low compared with historical experience,” the RBA said in its corporate plan.
“The future path of global monetary policy and financial conditions more generally remain subject to substantial uncertainty. These global factors significantly influence the environment in which monetary policy in Australia is conducted,” the RBA said.
Last week, RBA governor Philip Lowe reflected on the RBA’s decision on the cash rate during an address to Jackson Hole Symposium in Wyoming.
“So the question the Reserve Bank Board often asks itself in making its interest rate decision is how our decision can best contribute to the welfare of the Australian people,” Mr Lowe said.
“Keeping inflation close to target is part of the answer, but it is not the full answer. Given the uncertainties we face, it is appropriate that we have a degree of flexibility, but when we use this flexibility we need to explain why we are doing so and how our decisions are consistent with our mandate.”
He said a challenge the central bank is facing is elevated expectations that monetary policy can deliver economic prosperity.
“The reality is more complicated than this, not least because weak growth in output and incomes is largely reflecting structural factors,” Mr Lowe commented.
“Another element of the reality we face is that monetary policy is just one of the levers that are potentially available for managing the economy. And, arguably, given the challenges we face at the moment, it is not the best lever.”
The RBA is due to deliver its cash rate decision tomorrow.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].