Friday, February 24, 2017

Forget rate cuts. RBA chief Philip Lowe overrules his staff

Reserve Bank governor Philip Lowe has no plans to cut interest rates, and worries that if he did, he would make an already indebted nation "more fragile".

Appearing before a parliamentary committee after five months in the role, Dr Lowe conceded that others in the Bank took a different view.

"People on my own staff argue this," he told the hearing.

"The counter-argument is that lower interest rates would mainly work through encouraging people to borrow more. That would probably push up house prices a bit more, because most of the borrowing would be borrowing for housing."

"Household debt is at record levels. Is it really in the national interest to get a little bit more employment in the short-term at the expense of encouraging that fragility?"

Dr Lowe pointed to "green shoots" of economic recovery, even in the poorest-performing state, Western Australia.

"The headwind from falling commodity prices turned into a gentle tailwind as commodity prices lifted," he said. "And the headwind from falling mining investment should blow itself out before too long."

Offering a "personal perspective" on house prices, he said he had two teenage children who would soon need places to live.

"I'll be OK because I am paid a lot of money," he said. "But high prices are entrenching inequality."

In the days of higher wage growth, it was much easier to pay off a home loan. With wage growth now near 2 per cent, buyers were forced to bear the burden of high payments for much longer.

Tightening the negative gearing and capital gains tax concessions would take some heat out of the market.

While negative gearing by itself wasn't the issue, in combination with capital gains tax discounts, it fuelled investor buying, which pushed up prices.

It was too early to tell how the policies of US president Donald Trump would affect Australia and the global economy, but the biggest risk was that he would erect barriers that wound back international trade.

"We will be the big losers if that deteriorates," Dr Lowe said. "Our ability to sell our minerals, and our services to the rest of the world, is critical to our standard of living."

"The idea that we make ourselves wealthier by erecting barriers, it's crazy."

Governor Lowe understood the argument for a lower company tax rate but wasn't advocating it.

"Since the financial crisis other governments have been talking about company tax rates as low as 15 to 20 per cent," he said.

"You could argue that from a global perspective that is not useful. But that's not the world that we live in. The choice for the Parliament is whether to respond."

"Australia has lots of advantages and firms come here for a lot of reasons, but tax is a consideration, and I think if you are uncompetitive you will probably get a few less dollars of capital formation from foreign firms.

"It's a choice for the Parliament. It's a decision about foreign, not Australian investment, because dividend imputation makes a tax-cut effectively irrelevant for Australian companies".

In The Age and Sydney Morning Herald