Photographer: Brendon Thorne/Bloomberg

Australia's Economy Is Improving, Central Bank Chief Says

  • Global rate rises have “no automatic implications”: Lowe
  • Governor delivers speech in Perth on economy’s next chapter

Australia’s central bank chief signaled no rush to join global peers in reining in stimulus even as the nation’s economy “does look to be improving”.

Hours after the Federal Reserve suggested it would hike again this year, Philip Lowe reiterated that a rise in global interest rates “has no automatic implications” for Australia, in a speech delivered in Perth. The Australian dollar fell almost half a U.S. cent.

Still, Lowe warned that the tightening would eventually flow through Down Under and people should be prepared for that as the jobs market improves and inflation rises. He said a flexible currency gives the central bank “considerable independence regarding the timing as to when this might happen.”

“There was some speculation that Lowe may have used the speech to lay the ground work for future rate hikes,” said Kristina Clifton, an economist at Commonwealth Bank of Australia. “Instead, the speech had a more medium term focus.”

Seeking to close the door on the mining boom era and explore the economy’s “next chapter”, Lowe discussed the impact of technology and the growth of Asia; the normalization of international monetary conditions; the effects of higher levels of household debt; and the capability of Australia’s workforce and businesses to be flexible, innovative and adaptable.

Business, Jobs

The Reserve Bank of Australia has kept interest rates at a record low for the past 13 months to spur a transition to services from mining. In his speech, the governor was positive on the outlook for business investment and the strength of employment growth.

“We have provided support and allowed time for the economy to adjust to the new circumstances. In its decisions, the board has been careful to balance the benefit of providing this support with the risks that can come from rising household debt,” Lowe said. “We look to be on course to make further progress in reducing unemployment and moving towards the midpoint of the medium-term inflation target. This would be a good outcome.”

The governor also stressed the importance of the U.S. as a supporter of open markets and a rules-based international system and its role as a breeding ground for much of the progress in technology. At home, he reaffirmed the central bank’s focus on levels of household debt and the risk that a minor shock could become a major correction.

Lowe pointed out that he’d said little on monetary policy in the speech: “This is partly because there are other forces that are likely to be more important in shaping the next chapter of the Australian economy.”

Monetary policy has an important role to play in supporting the economy as it goes through the current period of adjustment and stabilizing it after shocks, he said. It can also make for a more predictable investment climate, while having a competent, analytical, transparent and independent central bank can be a source of confidence in the country.

“But beyond these effects, monetary policy has little influence on the economy’s potential growth rate,” Lowe said.

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