Reserve Bank of Australia board member Ian Harper said economic growth isn’t strong enough to justify an interest-rate increase and policy makers can do little but look on as the local dollar appreciates.
While it’s “terrific” full-time employment growth is strong and unemployment is slowly coming down, it’s a “concern” to see under-employment isn’t moving much and wages and household income growth are slow, because that indicates excess capacity, Harper said.
“As well as we’re doing, the Australian economy is still operating below its potential,” said Harper, who began his five-year term on the RBA’s board in July last year. “So long as that is the case, why would anyone be suggesting tightening monetary policy when the economy is operating below potential? I mean hello?”
The central bank has left its cash rate unchanged for 13 months and markets are pricing in little chance of a move in the next year. While the economy is transitioning to services-driven growth from mining, the jobs market is strengthening and investment intentions are improving, a resurgent currency is a new headwind. At the same time, households are struggling with record-high debt and stagnant incomes that pose a risk to spending.
“Consumption is two-thirds of gross domestic product,” Harper said. “If households as a group were suddenly to decide that we really can’t afford this now, we’re going to start to slow up consumption to keep ourselves on an even keel, then that will certainly pull GDP growth away from where we want it to be.”
Harper is one of six independent directors among the nine-member panel that also includes Governor Philip Lowe, Deputy Governor Guy Debelle and Secretary to the Treasury John Fraser. Days after Harper joined the board, the central bank cut rates to a record-low 1.5 percent, its last easing; a few weeks later Lowe succeeded Glenn Stevens as governor.
Low rates have fuelled a surge in Sydney and Melbourne house prices, prompting regulators to introduce lending curbs to strengthen financial stability.
Data last month showed national house prices grew just 0.1 percent and were unchanged in Sydney. Interest-only loans, particularly for investors, have eased off since the curbs were imposed, and a switch back to lending to owner-occupiers is under way, which is what the regulators were aiming to achieve.
“You’ve got the two arms of policy working together as you would hope,” said Harper, who is also a senior adviser at Deloitte Access Economics Ltd. “The cash rate is obviously a blunt instrument, and it flattens a whole lot of things that you don’t want flattened. The more surgical approach is to engage a prudential regulation in ways which primarily have to do with risk management. But there is a macro-prudential element these days as well.”
“The data would indicate at this juncture that things are working pretty much as we had hoped,” he said. While Australia’s economy expanded 0.8 percent in the second quarter, accelerating from 0.3 percent in the weather-affected first three months, an emerging problem is the currency, which has climbed from 69 US cents at the start of 2016 to 80 cents now.
Harper acknowledged the stronger Aussie could put a brake on growth. But he said there was little RBA officials could do given the appreciation is being driven by weakness in the US dollar.