RBA Governor Philip Lowe says debt is the biggest domestic risk facing the Australian economy

Mark Makela/ Corbis via Getty Images
  • Reserve Bank of Australia (RBA) Governor Philip Lowe doesn’t seem keen to cut interest rates anytime soon.
  • However, nor does he seem keen to lift them in the foreseeable future, either.
  • Lowe says that rather than low inflation, very high debt levels, and asset prices, are the “number one domestic risk” facing the Australian economy.

Reserve Bank of Australia (RBA) Governor Philip Lowe doesn’t seem keen to cut interest rates anytime soon. However, nor does he seem keen to lift them in the foreseeable future, either.

Speaking at the European Central Bank’s (ECB) forum in Sintra, Portugal, Lowe said that the biggest risk to the Australian economy was not persistently low inflation but rather household debt levels.

“I remain confident we’re going to get back to 2.5%, it’s just going to take us a bit of time,” Lowe said, referring to the midpoint of the RBA’s 2-3% inflation target.

“To try to get it back to 2.5% very quickly, it would be mainly through people borrowing more money, and having higher asset prices — I think that’s a much bigger risk to our economy than people having surprisingly low inflation expectations.”

That’s a big hint that Lowe believes a further reduction in the cash rate could well deliver more harm than good, at least in the medium-to-long term.

Reinforcing that point, Lowe said that very high debt levels, and asset prices, are the “number one domestic risk” facing the Australian economy.

As such, he said that the best course of action is to be patient, especially if progress is being made in lifting inflationary pressures.

“The welfare-maximising approach — which is really what we’re about, maximising the welfare of the people — is to be patient, as long as the labor market is improving,” Lowe said.

“As long as we’re moving in the right direction, we don’t need to force the process more quickly through monetary stimulus.”

Given the reluctance to cut official interest rates further, Lowe said it “leaves us with the possibility of accepting that inflation might just a bit lower than we’d like for a while.

“That’s difficult for the central bank to accept,” he said.

In a speech delivered last week, Lowe said that the next move in the cash rate was likely to be higher “if” the economy continues to head in the right direction.

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.