The Reserve Bank of Australia’s interest-rate increase last month was an effort to preempt “uncomfortably high” inflation and a rise in household savings may help that effort, Assistant Governor Philip Lowe said.
Policy makers opted for an “early and modest adjustment” to borrowing costs on Nov. 2 to avoid a “more substantial increase in interest rates later on,” Lowe said in a speech yesterday in Sydney. He didn’t address an RBA decision two days ago to leave the overnight cash rate target at 4.75 percent.
Growth in Australia, where unemployment is about half the U.S.’s 9.8 percent, is forecast to strengthen as energy companies such as BG Group Plc add jobs. The RBA boosted borrowing costs last month six days after a report showed a smaller-than-projected gain in consumer prices in the third quarter.
The decision to tighten policy “was taken not because the economy is currently growing too quickly or that inflation is currently too high. Clearly, neither is the case,” Lowe, who heads the central bank’s economics department, told the Australian Business Economists Annual Forecasting Conference.
“Rather, it was made on the basis of the outlook for output and inflation,” he said. “With the economy currently operating with relatively limited spare capacity at a time when a substantial lift in investment is expected, it was judged that inflation was more likely to rise than fall” in coming years.
Employment in Australia rose by 29,700 jobs in October from September, a government report last month showed, almost 50 percent more than the median forecast for a 20,000 increase in a Bloomberg News survey. The jobless rate was 5.4 percent in October. Economists surveyed by Bloomberg News predict a government report today will show the rate dropped last month to 5.2 percent, according to the median of 26 estimates.
The RBA has raised rates seven times in the past 15 months, the most aggressive round of increases among the Group of 20, as the nation experiences what Lowe called a “once-in-a-century boom in the terms of trade.”
U.K.-based BG Group said Oct. 31 it will begin building a $15 billion liquefied natural gas venture in Queensland state, generating 5,000 construction jobs. Investment there and in Western Australia, including Chevron Corp.’s A$43 ($42 billion) Gorgon gas project, is growing because of stronger Chinese demand for raw materials.
Even so, a report last week showed the economy expanded 0.2 percent in the third quarter from the previous period, the worst performance since a contraction at the end of 2008. The data on gross domestic product also showed Australians’ savings as a share of disposable income climbed to 10.2 percent from 8.9 percent in the second quarter.
“It would appear that many households now view high levels of debt and low rates of saving as more risky than they did previously,” Lowe said. “We have, for some time, been assuming that the household saving rate stays high for quite a while yet.”
Should that occur, “not only would it lead to a lowering of risk in household balance sheets, but it would reduce inflationary pressures during the period of high investment,” the assistant governor said.
Responding to questions from the audience after his speech, Lowe said Australia’s economy is growing “close to trend” and is likely to pick up “a bit” in coming years.
He said that while higher borrowing costs have played some role in increasing household spending restraint, the shift is mainly a result of consumers reassessing risk. That caution is “broadly welcome” because it allows for increased investment in the mining industry and helps contain inflation pressures, he said.
RBA Governor Glenn Stevens said in October that a slowdown in productivity in the Australian economy is probably tied to a buildup of the nation’s resources industries, where there will likely be “large gains” in the future.
In his prepared remarks, Lowe said a key question facing Australian economic forecasters in coming years is whether the ongoing capital investment boom will translate into higher levels of productivity that boost the economy’s capacity to grow.
“If indeed potential output growth were to pick up, this would mean that the economy could grow more quickly over the medium term without causing inflation to rise,” Lowe said in the speech. “But in the short term, producing and installing the increased capital can add to demand pressures in the economy.”