RBA governor Philip Lowe has warned that low rates could be “too much of a good thing” while hitting back against claims that they’ve weakened consumer confidence.
Speaking to the National Press Club in his first address of 2020, governor Lowe acknowledged that while the low rate environment had encouraged investors to take more risks it had also driven excessive asset valuations.
“Both higher asset prices and a willingness to take more risk can be good for the global economy, especially if they lead to more investment, not just more borrowing,” governor Lowe said.
“We do, though, need to remember that it is possible to have too much of a good thing.
“We are aware of the risk of low interest rates encouraging too much borrowing and driving excessive asset valuations. So we will continue to watch borrowing, in particular, very carefully.”
But Lowe hit back at suggestions that the RBA’s successive rate cuts had led to weakened consumer confidence.
“I would like to address one point that I hear frequently: that the Reserve Bank’s decision to cut interest rates last year dented consumer confidence and that this is what lies behind the weak consumption growth,” governor Lowe said.
“I certainly understand that having interest rates at very low levels has unsettled some people. But I don’t accept the idea that this is what is driving weak consumption. There is something deeper going on.”
Mr Lowe believes that Australians were already adjusting their spending to a combination of subdued wages growth, the fall in house prices, and high levels of debt – and that if the RBA hadn’t slashed rates, things could have been worse.
“My judgement is that if the Reserve Bank had not eased monetary policy last year, this adjustment by households would have been harder, the balance sheet repair would have been more difficult, and the economy would have been weaker.”
But governor Lowe also acknowledged that that the RBA was running out of ammunition to ward off a recession and that fiscal policy could play a larger role in deciding the future direction of the economy.
“The standard way of thinking for the last 20 years has been that monetary policy really is the stabiliser, deals with the economic cycle, and fiscal policy just deals with structural issues,” governor Lowe said.
“But with interest rates as low as they are there is limited scope in the future, probably, for monetary policy to play exactly the same role that it used to play. We don’t have the capacity to lower interest rates a lot further… is there more that fiscal policy can do if monetary policy can’t do it?”
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