Monetary policy has a key role to play in the evolution of the Australian economy as it responds to structural change, the Reserve Bank of Australia (RBA) says.
Addressing an economic forum in Sydney, RBA deputy governor Philip Lowe said that key industries, as well as government and monetary policy, also had a role to play in supporting this evolution.
The strong Australian dollar and mining boom were already creating structural change, Dr Lowe said, with investment being the main beneficiary.
“Australia is currently experiencing, on the one hand, a once-in-a-century terms of trade and investment boom and, on the other, a very high exchange rate,” he said.
“It is in the investment figures where the evidence of structural change is clearest.
“Over the next few years, mining-sector investment will reach new highs as a share of GDP (gross domestic product), and is likely to account for around 40 per cent of total business investment.”
The central bank itself would need to respond actively to structural change by keeping inflation low, and analysing the forces of supply and demand in the economy, he added.
“The main role for monetary policy is to keep inflation low and stable,” he said.
“The current list of economic uncertainties is long enough without adding uncertainty about the general level of prices to the list.”
Flexibility would be a key part of the RBA’s response to these changes, leaving room for movements in the cash rate, if factors such as unemployment, pointed to changes in the economy.
“If the unemployment rate were to rise persistently, it might suggest that the contractionary effect of the high exchange rate was more than offsetting the expansionary effect of the investment boom and the terms of trade,” Dr Lowe said.
“If this were to turn out to be the case, monetary policy would have the flexibility to respond provided the inflation outlook remained benign.”
Dr Lowe said Australia would also need to be adaptable to trends in other economies, notably China.
“China has been a substantial source of growth in the Australian economy, and it will continue to be like that,” he said.
“But there will be ups and downs, and we have to, as a nation, be prepared for that and we need to keep flexibility on a whole range of policies to deal with that.
“But in the medium term, the central scenario’s a good one.”
JP Morgan economist Ben Jarman said Dr Lowe’s speech showed the RBA was generally positive about the direction the Australian economy was taking, and did not view an easing in monetary policy as necessary at this time.
“Today’s speech by RBA Deputy Governor Lowe similarly maintained the official line that while the bank is not blind to the stresses induced by the structural adjustments underway in the economy, they also have to think about the less direct (and inflationary) benefits, and recognise that monetary policy cannot and should not stand in the way of those adjustments,” Mr Jarman said.
“The Deputy Governor’s comments are consistent with our view that it will take a significant turn in the data for further easing to be delivered.”
