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I won’t be pushed to push up rates, says RBA governor Philip Lowe

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Reserve Bank of Australia governor Philip Lowe has hit out at calls for a rise in interest rates, saying he won’t adjust the bank’s record low cash rate of 1.5 per cent any time soon and he won’t be swayed by increases overseas.

Opening the A50 forum of leading international fund managers in Sydney, Dr Lowe said he was often asked whether increases by other central banks meant he had to push up Australia’s rates.

Reserve Bank governor Philip Lowe. Reserve Bank governor Philip Lowe. Photo: Bloomberg

His answer was that while there was a common element in worldwide interest rate moves, rates did not need to move in lock-step.

Countries with floating exchange rates like Australia retained considerable flexibility.

Dr Lowe said the latest sharemarket slump had not changed his belief that the Australian economy would grow faster in ... Dr Lowe said the latest sharemarket slump had not changed his belief that the Australian economy would grow faster in 2018 and 2019 than it did in 2016 and 2017.  Photo: AP

“We did not lower our interest rates to the extraordinarily low levels seen elsewhere after the financial crisis,” he said. “Our circumstances were different: we did not have a meltdown in the financial system and we experienced a very large cycle in commodity prices.

“Just as we did not move in lock-step on the way down, we do not need to do so in the other direction. It is understandable that some other central banks are raising rates. They lowered their rates by more than us and, in a number of countries, the unemployment rate is now below conventional estimates of full employment.”

Australia’s circumstances were different.

Australia was still some way from what could be considered full employment, and inflation was set to remain below the midpoint of the bank’s target range for the next couple of years.

“We expect, though, to make further progress in reducing unemployment and having inflation return to the midpoint. If we do make that progress, at some point it will be appropriate for interest rates in Australia to also start moving up,” he said.

It was likely that the next move in Australia would be up, not down.

“If this is how things play out, the likely timing will depend upon the extent and pace of the progress that we make,” Dr Lowe said.

“While we do expect steady progress, that progress is likely to be only gradual. Given this, the Reserve Bank board does not see a strong case for a near-term adjustment in monetary policy.

“It will of course keep that judgment under review.”

The unusually blunt statement as good as rules out a lift in the cash rate for some time and takes still more upwards pressure off the Australian dollar, which has slid from 81 to 78 US cents over the past few weeks.

Dr Lowe said the sharemarket slump that began in the United States on Friday had not changed his belief that the Australian economy would grow faster in 2018 and 2019 than it did in 2016 and 2017.

“We are all but through the decline in mining investment to more normal levels, there is a large pipeline of urban infrastructure work to be done, the global economy is experiencing a solid upswing, commodity prices are up and financial conditions remain accommodative,” he said.

The official Reserve Bank forecasts to be released on Friday would contain largely unchanged forecasters of economic growth above 3 per cent for the next two years.

For some time, many investors in the US had been working under the assumption that unusually low inflation and unusually low volatility in asset prices would persist. When that assumption was proved wrong by an unusually strong wage growth figure, they adjusted share prices in the manner that would have been expected.

One of Australia’s biggest challenges was providing the infrastructure needed to support a growing population and to lift productivity.

In what might be a veiled criticism of government infrastructure spending, Dr Lowe said it was important to pay close attention to the governance of decisions around project selection, the control of construction costs, usage pricing and the allocation of risk between the public and private sectors.

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