Cheers to our cup-half-full economy (because the alternative is sobering)


Hardly surprising, then, that Lowe should seize the opportunity presented by the central bank’s traditional January shutdown to take an extended three-week break.

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“I’ve got three teenage children, and so it was good to spend time with them,” he reflected on Wednesday, in the wake of the Reserve’s controversial decision on Tuesday – controversial among economists, at least – to leave interest rates on hold.

“We had one week at home and … I spent time in San Francisco and Palm Springs playing golf with my three kids. So that was a lot of fun.”

Perhaps a little too much rest and relaxation, according to the professional economic forecasting community, which was almost universally wrongfooted this week in tipping another interest rate cut. Some have labelled Lowe “excessively optimistic”.

But it’s not just the balmy Palm Springs air – a comfortable 21 degrees in winter – lingering in the governor’s mind. Over summer, the data flow on the Australian economy has hit a warm patch. Retail sales figures for November were stronger than expected and the jobless rate relaxed back down to 5.1 per cent.

Of course, bushfires have unleashed unprecedented damage, destroying lives and livelihoods in affected areas. But, according to Lowe, the Reserve expects the impact of fires on the broader economy to be contained to about 0.2 percentage points across the December and March quarters. And this will be entirely offset by a later rebuilding boom.

As for the coronavirus, currently cutting a swath through domestic tourism and growth prospects in our largest trading partner, Lowe notes that previous outbreaks, such as SARS, have proved shortlived in their economic impact. And anyway, it’s too soon to tell.

On the whole, things are looking up, Lowe insists.

Last year’s interest rate cuts are working, in a number of ways. By keeping the Australian dollar low, they’re relieving pressure on Aussie exporters.

By cutting interest bills on loans, they’re putting more dollars back into the pockets of Aussie households. It’s true households have been reluctant, so far, to spend them.

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But interest rate cuts are notorious for working with a “long and variable lag”, says Lowe. That is, it takes some time for households to realise they’ve accumulated a significant buffer – significant enough to fund that new couch or kitchen renovation they’ve been talking about for years.

Meanwhile, the turnaround in the property market – in part, a direct result of lower interest rates – is boosting household confidence via the “wealth effect”.

Overall, Lowe says it’s only a matter of time before households get out their wallets again and start spending, which will in turn drive business investment and jobs growth again. As a result, the bank still sees the nation’s growth rate picking up again and the jobless rate falling to below 5 per cent next year.

To those who say interest rate cuts have done more to damage confidence than boost the economy, Lowe says: rubbish.

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“I certainly understand that having interest rates at very low levels has unsettled some people,” he says. “But I don’t accept the idea that this is what is driving weak consumption.

“My judgment is that if the Reserve Bank had not eased monetary policy last year, this adjustment by households would have been harder, the balance sheet repair would have been more difficult, and the economy would have been weaker.”

Longer term, Lowe is back to heaping praise on the “fabulous fundamentals” of the Australian economy, including: our bountiful natural resources, our skilled workforce, our sound public finances, and our diverse and growing population.

Indeed, Lowe’s cup is positively overflowing when he speaks of the way clever Aussie businesses will surely soon figure out ways to use ultra-low interest rates to start investing in new business ideas.

Let’s hope he’s right.

Because the truth is, Lowe is running out of room to provide much more assistance. To cut borrowing rates any further from here may fuel a house-price frenzy and excessive risk-taking in other sectors.

Should joblessness rise again, however, such action may well still be needed.

Lowe is hoping not. And hope springs eternal.

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