Home

RBA concerned about weak business investment

Headshot of Sean Smith
Sean SmithThe West Australian
Reserve Bank governor Philip Lowe is concerned about weak business investment.
Camera IconReserve Bank governor Philip Lowe is concerned about weak business investment. Credit: JOEL CARRETT/AAPIMAGE

Reserve Bank governor Philip Lowe has raised concern about weak business investment potentially hampering Australia’s economic recovery and warned that regulators will act if lending standards deteriorate again.

In a speech to a Sydney audience, Dr Lowe said also that wages growth was still too low for the Reserve Bank to consider lifting official interest rates.

Dr Lowe said rising consumption and falling unemployment did “not negate the fact that there is still a long way to go and that the Australian economy is operating well short of full capacity”.

In particular, despite a pick-up in the December quarter, business investment is still 7 per cent down on a year ago and more than 10 per cent off whether the bank thought it would be at the beginning of 2020.

Get in front of tomorrow's news for FREE

Journalism for the curious Australian across politics, business, culture and opinion.

READ NOW

Investment was already low going into the pandemic and Dr Lowe said a durable recovery was dependent on a strong and sustained pick-up.

“Not only would this provide a needed boost to aggregate demand over the next couple of years, but it would also help build the capital stock that is needed to support future production,” he said.

“Stronger investment would also support a more productive workforce and a lift in both nominal and real wages.

“Unfortunately, there is no magic ingredient for boosting business investment.

“A good starting point, though, is businesses having confidence that the economy will grow and that there will be demand for their products and services.”

Dr Lowe said there was “no shortage of areas where additional investment would help our economy grow< including infrastructure, power generation and distribution, health and social services, food production, advanced manufacturing and digitalisation and data science.

He noted that bond markets were pricing in possible increases in official interest rates as early as next year and then again in 2023.

“This is not an expectation that we share,” he said.

For inflation to sustainably fall within the Reserve Bank’s target range of 2 per cent to 3 per cent, wages growth would need to be above 3 per cent.

“Currently, wages growth is running at just 1.4 per cent, the lowest rate on record,” Dr Lowe said.

“Even before the pandemic, wages were increasing at a rate that was not consistent with the inflation target being achieved.

“Then the pandemic resulted in a further step-down. This step-down means that we are a long way from a world in which wages growth is running at 3 per cent plus.”

Dr Lowe said the evidence from both Australia and overseas suggested “that the journey back to sustainably higher rates of wages growth will take time and will require a tight labour market for an extended period.”

He conceded that rising house prices, fuelled by low rates, “raise concerns for many people”, but reiterated that the Reserve Bank did not target the housing market, “nor would it make sense to do so”.

However, the bank would continue “to pay close attention to lending standards, especially given the combination of low interest rates and rising housing prices”.

“Looser standards would increase medium-term risks and add to the upward pressure on prices, so would be of concern,” Dr Lowe said.

“Reflecting this, the Council of Financial Regulators has indicated that it would consider possible responses should lending standards deteriorate and financial risks increase.

“We are not at this point, but we are watching carefully.”

Get the latest news from thewest.com.au in your inbox.

Sign up for our emails