(Bloomberg) -- Australia's central bank Governor Philip Lowe said the economy still needs low interest rates to help bring down unemployment and spur core inflation to the mid-point of the 2 percent to 3 percent target.
At a Reserve Bank of Australia board dinner in Brisbane Tuesday, Lowe said that loose policy was assisting the economy by bringing down unemployment and encouraging companies to push ahead with investment plans.
“The board has been prepared to be patient and has not sought to overly engineer or fine-tune things,” Lowe said in notes of a speech delivered just hours after he and the board kept rates unchanged at a record-low 1.5 percent. “In our view, the balance we have struck is appropriate and it is likely that the economy will pick up from here as the drag from declining mining investment comes to an end.”
Read more: RBA holds interest rates for 13th straight month
The RBA has grown increasingly confident that the economy is successfully transitioning from mining investment to other drivers as full-time jobs increase, economic growth is forecast to accelerate and firms signal they're preparing to invest. Yet record household debt and weak wage growth are likely to curb consumption and keep inflation contained, meaning policy makers want to see pay packets fatten up.
Weak wages are afflicting many advanced economies, with the U.S., U.K., Germany and Japan at or near full employment and still failing to generate solid wage growth.
Lowe noted that household borrowing has increased at an average rate of 6.5 percent over the past four years, while household income has gained an average 3.5 percent, prompting the RBA and regulators to ensure lending practices remains sound. He said that some loans had been extended where the borrower “had only the slimmest of spare income,” requiring regulators to tighten lending criteria.
“One might ask why lenders themselves did not do more to constrain their activities in these areas, given the earlier trends were adding to risk in the overall system,” Lowe said. “When everything is going well, it appears that any single institution has difficulty pulling back.”
‘Not Helpful'
Referring to surrounding Queensland's struggles with the unwinding of mining investment, Lowe noted that a decline in the currency since the resources boom had helped the state's tourism, education and rural industries. “An appreciating exchange rate would not be helpful from this perspective,” he said, repeating a regular refrain.
The governor also referred back to minutes of the July board meeting, which detailed a special discussion on the RBA's estimated level of the neutral cash rate. He reiterated that its consideration carried no message about the short-term outlook for monetary policy.
“As we make further progress on both unemployment and inflation, we could expect the cash rate to move towards this neutral rate over time,” he said.
China Discussion
This month's special topic, he said, was on the Chinese economy and the trade-offs facing authorities as they try to address large and rising debt levels and at the same time achieve growth targets “that are still quite high.” Lowe said it's an open question whether both of those objectives can be achieved, though it's very much in Australia's interest that the right balance is struck.
China is Australia's biggest trading partner and, among all developed nations, Australia's economy is the most dependent on China.
The board also discussed the progress of implementing structural reforms announced in 2013 at the Third Plenum, noting there had been progress.
“On the other hand, there is still some way to go to meet the goal of allowing market forces to play a decisive role in resource allocation,” Lowe said. “Reform of state-owned enterprises has been slower than many had hoped for and the state, rather than market prices, still has a strong influence in allocating resources in parts of the economy.”
To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net.
To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
