RBA Deputy Governor Phil Lowe issued the Government, and the Parliament, a warning that monetary policy and the RBA, can’t rescue the economy on their own.
Speaking at the Goldman Sachs Annual Global Macro Economic Conference Lowe said:
At the end of the day, the solution to the problems caused by the disconnect between the desire to save and the desire to invest cannot lie with monetary policy. Instead, it lies in measures to improve the investment environment so that once again there is strong productive demand for the use of our societies’ savings.
From a central banker, and a public servant, that is rather strong language.
What is behind Lowes comment is his assertion that consumers, the world over, are not prepared to borrow from the future in order to spend in the present because of the high debt levels overseas (and in Australia) and because of the experience of the GFC.
Likewise, people living off their savings have to adjust to the low interest rate environment and reduced income.
There are reasonable grounds to believe that the behaviour of both borrowers and savers might have changed a little. Many borrowers have responded to the lower interest rates of recent years by paying off their loan a little faster, rather than increasing their spending. This is evident in the data on total mortgage repayments and scheduled repayments. Conversely, it seems likely that those relying on interest income have reduced their spending by more than would previously have been the case.
Both comments suggest that Lowe, and his counterparts at the RBA, may feel that monetary policy in Australia is reaching the limits of efficacy.
Certainly that was the message in the release of Q4 GDP yesterday. Consumers and housing are doing their bit. It is investment and employment that Australia needs.
As Former US Treasury Secretary Larry Summers told McKinsey recently “Confidence is the cheapest form of stimulus.”
Phil Lowe appears to be giving the Government the same message.