New Reserve Bank governor Philip Lowe has urged governments and business to take advantage of the low interest rate environment to invest in assets like infrastructure.
In his first appearance in front of a parliamentary committee as head of the central bank, Dr Lowe also indicated a further reduction in interest rates could not be ruled out.
Dr Lowe took over from Glenn Stevens as governor last weekend, who retired after 10 years in the top job.
Like his predecessor, Dr Lowe regards himself as an optimist and was “very pleased” when Mr Stevens left him a prized procession – a coffee mug emblazoned with the word “half full”.
“He had that in his office for quite some time and it’s the one thing he’s left me … that’s my mindset as well,” he assured the House of Representatives economics committee in Sydney on Thursday.
However, echoing a new report by the Organisation for Economic Co-operation and Development, Dr Lowe urged governments and the private sector to use the low interest rates available to invest in infrastructure.
“The reason why … monetary policy is not working globally, no one wants to use low interest rates to increase their spending,” he said.
In its interim economic outlook released in Paris on Wednesday, the OECD again lowered its global growth forecast for both this year and next.
“The world economy remains in a low-growth trap,” the OECD warned.
Persistent poor growth expectations are depressing trade, investment, productivity and wages, which in turn is leading to a further downward revision in growth expectations and subdued demand.
Treasurer Scott Morrison believes the challenge is to get private investment active again and that’s why the government is pursuing it’s 10-year enterprise plan “to get capital out of its cave.”
“We have got to have private capital-led recovery,” Mr Morrison told Business Insider.
Dr Lowe didn’t rule out having to cut the Australian official cash rate again, even if it’s already at a record low after two cuts this year.
“That’s possible, it’s going to depend on a whole range of factors,” he said.
These include what happens overseas, the next Australian inflation data, and how the labour market and housing markets are performing.
Financial markets are factoring in a 50 per cent probability of a further interest cut from 1.5 per cent to 1.25 per cent.
But the governor believes it is unlikely Australia will run out of “monetary room” and force it to undertake “incredibly unusual things” like other countries where they have zero interest rates.
Dr Lowe defended keeping the long-standing inflation target of two to three per cent, saying it had served Australia well, as low and stable inflation remains an important precondition for strong and sustainable growth in employment and incomes.
Some economists have questioned whether the target over time remains appropriate, given inflation has been below the band since late 2014.
Dr Lowe said the Reserve Bank took a flexible approach to inflation targeting and it was not its job to always keep inflation tightly within a narrow range.
“We have not been what some have called ‘inflation nutters’,” he said.