RBA’s outgoing boss delivers home truths on economy

Outgoing Reserve Bank Governor Philip Lowe has used a farewell address to deliver some insightful remarks about inflation, unemployment and productivity.

Before Dr Lowe became governor, inflation was quite stable. But during his seven-year stint in the top job, inflation ranged from a low of -0.3% to a high of 7.8%. 

“My view is that it will be difficult to return to the earlier world in which inflation tracked in a very narrow range,” he said.

“The increased prevalence of supply shocks, deglobalisation, climate change, the energy transition and shifts in demographics mean either steeper supply curves or more variable supply curves. While this doesn’t mean that the inflation target can’t be achieved on average, it does mean that inflation is likely to be more variable around that target.”

Unemployment

During Dr Lowe's governorship, unemployment fell from a range of 5.5-6.0% to about 3.5% – the lowest rate in nearly 50 years.

“The share of Australians with a job has never been higher than it is today and the number of people with a job has increased by more than 2 million since mid-2016,” he said.

“The current cycle still has a way to run, but it is possible that Australia can sustain unemployment rates below what we have had over the past 40 years. If so, this would be very good news for both the economy and our society.”

Productivity

Dr Lowe said it was vital for Australia to increase its productivity growth, because that was “central to our future prosperity”. Unfortunately, though, our recent record on productivity had been poor.

“There have been many investigations into the underlying causes and what to do about this. So, there is no shortage of ideas, including in the areas of tax, human capital accumulation, energy and infrastructure, the design of our cities, the approach to regulation and competition policy, industrial relations and the provision of government services,” he said.

“There are improvement opportunities in all these areas. The problem is not a lack of ideas. Instead, it is in building the consensus within society to implement some of these ideas. This is, fundamentally, a political problem, and it is a major problem. If we can’t build a consensus for changes, the economy will drift and there is a material risk that our living standards will stagnate.”