RBA's Heath Says Low Rates Having Limited Impact on Investment

  • Wages playing `significant role' in terms of trade adjustment
  • Hurdle rates may not be sensitive to cost of capital changes

Australia’s record-low interest rates are having limited impact on firms’ investment decisions and unemployment will remain stable until economic growth accelerates “significantly,” central bank official Alexandra Heath said.

“Liaison contacts do not report that current levels of interest rates are discouraging them from investing,” Heath, head of the Economic Analysis Department, said in the text of a speech in Perth Thursday. “But neither do they typically indicate that the current low levels of interest rates are directly encouraging them to invest more.”

The Reserve Bank of Australia has been grappling with the vexed issue of stagnant spending by companies outside mining as it tries to promote a transition from resource investment. Heath’s speech sought to explain the role of business liaison in formulating monetary policy and gauging the strength of the economy.

She cited contacts with companies in helping the RBA understand the evolution of areas including the jobs market, wage claims and the level of return on investment that businesses require. The RBA has a team of about 15 economists in the liaison program and support staff in its offices around the country, she said.

Unemployment Rate

Australia’s unemployment rate has hovered between 6 percent and 6.25 percent in recent times, lower than the level the central bank had predicted, even as the economy expands at below its average pace. It grew 2 percent in the second quarter from a year earlier.

“Liaison tells us that wages are playing a more significant role in the adjustment of the economy to the lower terms of trade,” she said. Smaller pay increases could be a result of reduced inflation expectations and concern about job security among workers, she said.

“We now expect that the unemployment rate will remain roughly stable until growth in the economy picks up significantly from its current pace,” Heath said.

She said while some firms had reduced the rate of return needed to justify investment in line with the record-low 2 percent cash rate, many hadn’t.

“Liaison contacts have indicated that hurdle rates may not be sensitive to changes in the cost of capital because the true cost of capital is unobserved and therefore uncertain,” she said. “Another explanation contacts give is that changes in interest rates are often temporary.”