Governor of the Reserve Bank of Australia (RBA), Dr Phillip Lowe spoke this morning at the Citi Australia and New Zealand investment conference in Sydney. Dr Lowe outlined three key issues affecting the Australian economy at the moment and provided some clarity around the central bank’s strategies moving forward. The three primary issues were how much traction further monetary easing might get, the possible effect of further monetary easing on financial stability and longer-term macroeconomic stability and the current environment of international monetary policy.
With respect to the likelihood of traction that any further monetary easing might get in terms of better economic outcomes, the RBA governor said that he believes that it is reasonable that further monetary easing will gain traction. Additionally, he emphasised that the RBA will "now be putting a greater weight on actual, not forecast, inflation in our decision-making". This represents a shift of a reactive approach rather than a proactive approach to monetary policy. Dr Lowe provided an example through the labour market, by outlining that the RBA wants to see a return to labour market conditions "that are consistent with inflation being sustainably within the 2 to 3 per cent target range". With the latest Australian unemployment figures coming in at 6.9% (below economic forecasts of 7.0% and a 10-basis point increase on last month’s result of 6.8%), it appears that the aforementioned target range is out of reach, at least for the short to mid-term. It is also worth noting that Lowe made it distinctly clear that the RBA “does not expect to be increasing the cash rate for at least three years".
When commenting on the possible effect of further monetary easing on financial stability and longer-term macroeconomic stability, Dr Lowe mentioned that it is necessary that the benefits of job creation (as will be the case with the implementation of the latest budget), reparation of private sector balance sheets and improving arrears be measured against "any additional risks as people take more investment risk in the search for yield".
Lastly, Lowe talked on the topic of what is happening internationally with monetary policy (relating specifically to international exchange rates and bond yields). On this, the governor commented that "our balance sheet has increased considerably since March, but larger increases have occurred in other countries. We are considering the implications of this as we work through our own options."