RBA’s Lowe Frets Over Low Rates Risks, Urges Government Action

Australian central bank Deputy Governor Philip Lowe urged vigilance on asset prices inflated by record-low interest rates and said government action is needed to encourage companies to invest.

“Very low global interest rates have been with us for some time. And it is likely that they will stay with us,” Lowe said in a speech in Sydney late yesterday. “But the longer it runs on without a pickup in the appetite for real investment, the greater is the potential for new risks to develop.”

His remarks reflect rising concern at potential fallout from maintaining rates near zero in the U.S., euro zone, Japan and U.K., which is encouraging investors to take ever-greater risks to boost returns. The Reserve Bank of Australia, which cut its benchmark to a record low 2.5 percent last year to spur business spending and hiring, is grappling with a surge in investment in Sydney’s property market.

“On average, recent loans are probably a bit more risky than those made earlier,” Lowe said of borrowing in Australia to buy property. “The likelihood of some type of painful household balance adjustment in the event that there is a correction in the housing market, while still not high, has probably increased.”

Loan approvals to investors buying properties to rent out in Australia account for almost 45 percent of total loan approvals, and prices in Sydney have risen about 13 percent in the past year, according to the central bank.

Investment in housing by self-managed superannuation funds -- pensions managed by individuals rather than large money mangers -- are boosting prices “at the margin,” Lowe said in answer to a question after the speech.

‘Heavy Regulation’

The RBA has held talks with the Australian Prudential Regulation Authority on cooling lending to investors. Lowe said that “does not mean that a return to the type of heavy regulation we saw in earlier decades” is on the agenda.

“We need to be realistic about what can be achieved through changes in the regulatory parameters alone,” he said. “This realism, however, need not preclude consideration of modest and sensible changes within the existing prudential framework.”

Asked by an audience member whether housing investors in Australia were making a rational decision because interest rates had moved to a structurally lower level, Lowe said he disagreed. “I’m relatively optimistic that the structural rate of interest is not permanently lower,” he said. “What we really want is globally higher interest rates than we have now and on a sustainable basis.”

Structural Policies

Lowe also addressed the global conundrum of six years of low interest rates as Australia chairs the Group of 20 this year and seeks to encourage growth. He reiterated that nations need to promote “structural policies” that spur real investment, not just financial investment. He also repeated that with borrowing costs so low at the moment, it is the right time to press ahead with infrastructure investment.

“Both of these elements -- the promotion of real risk-taking and increased spending on infrastructure -- are central in delivering on the G-20 commitment to lift global gross domestic product by an additional 2 percent by 2018,” Lowe said. “Progress has been made on delivering on this commitment, although more is needed and effective implementation is clearly required.”

The key is to improve the investment climate, he said, adding monetary policy is playing an important role in this.

“But ultimately, monetary policy cannot drive the higher ongoing expected returns on capital that are required for sustained economic growth and for reasonable long-term returns to savers,” he said. “It is instead government policy -- including in some countries, increased spending on infrastructure -- that has perhaps the more important role to play here.”

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