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RBA couldn’t resist ‘gravitational pull’: Lowe

Lachlan Maddock
— 1 minute read

RBA governor Philip Lowe said the RBA has been forced to move in lockstep with other central banks and that more risk-taking is vital to getting the recovery back on track.

Speaking to the Committee for Economic Development of Australia (CEDA), Governor Lowe said that the RBA has been forced to play follow the leader as central banks unleashed quantitative easing programs and slashed rates to near zero or below. 

“If we had sought to ignore this gravitational pull, there would have been obvious implications for our exchange rate and our economy. If our interest rates were higher than in the major countries there would be stronger inflows into Australian dollar assets and this would put upward pressure on our exchange rate,” Governor Lowe said. 

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“In turn, this would make it harder to make the needed progress on jobs. Over the medium term, I do expect to see a time when Australia’s strong economic conditions once again justify higher interest rates. But today, during a global pandemic when a lot of people have lost their jobs and many businesses are struggling, is not the time for that.”

Governor Lowe also warned that businesses must avoid becoming “too risk averse” despite the fact that many will want to build savings buffers and be more cautious in taking on debt after a “sobering year”. 

“Over the past decade or so, there have been signs that our economy was becoming less dynamic. An increase in risk aversion would reinforce this trend,” Governor Lowe said.

“I understand that in an uncertain world, it can be hard to take on risk and there can be a natural tendency to avoid new risks. But, if businesses are to seize the opportunities that are out there to grow and to increase Australia’s productive capital base, some degree of risk-taking is necessary.”

Meanwhile, the minutes of the RBA’s November meeting show that the impact another cut would have on interest income, as well as concerns that the RBA would be perceived to be funding government expenditure, also almost led to another hold – but the RBA ultimately chose more decisive action in order to speed the return to full employment. 

“It was also likely that having the various arms of policy all taking steps in the same direction would deliver a greater impact than the sum of the individual parts. This would be especially so during a period in which the economy is opening up and people are more willing and able to spend,” the RBA said in the minutes of its 3 November meeting.

 

RBA couldn’t resist ‘gravitational pull’: Lowe
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