subscribe to our newsletter

RBA eyes 3% growth amid ‘troughed’ inflation

The Reserve Bank of Australia has doubled down on its 3 per cent growth target despite acknowledging that economic shocks “will occur” in the future.

Speaking at the Reserve Bank board dinner held on 5 September, RBA governor Philip Lowe said that the bank’s central scenario was for growth of “around 3 per cent over the next couple of years”.

The remarks come following the release of the RBA’s 2017/18 Corporate Plan in which the bank forecast an Australian economy that would “continue to change” between 2017 and 2021. Additionally, economic shocks, “which by definition are not forecastable, will occur”, the bank said.

Commenting on the RBA’s decision on 5 September to leave the official cash rate on hold at 1.5 per cent for the 13th month in a row, Mr Lowe said: “Our judgement has been that it was not in the public interest to encourage an already highly indebted household sector to borrow even more. More borrowing might have helped today, but it could come at a future cost.

“In our view, the balance we have struck is appropriate and it is likely that the economy will pick up from here as the drag from declining mining investment comes to an end.


“Our central scenario is for growth of around 3 per cent over the next couple of years and for the unemployment rate to move lower gradually.”

The RBA governor said that the current low level of interest rates “is helping the Australian economy” and noted that investment outlook has improved while inflation has “troughed” and will likely increase gradually in the next few years.

Reflecting on the discussion around the neutral interest rate, Mr Lowe said that the average level of interest rates both domestically and worldwide will likely be lower than before the global financial crisis, reflecting slower growth in the economy and a “shift in the balance between savings and investment”.

He continued: “A second conclusion from our discussion was that the cash rate is around 2 percentage points below our current estimate of the neutral rate.

“As we make further progress on both unemployment and inflation, we could expect the cash rate to move towards this neutral rate over time.”


Loans were being made for borrowers with ‘slimmest of spare income’

Mr Lowe noted that household borrowing over the past four years has increased at an average rate of 6.5 per cent, leaving household income growth lagging behind with an average rate of 3.5 per cent.

“Given this, the RBA has worked closely with APRA to ensure that lending practices remain sound. Rightly, APRA has had a strong focus on loan serviceability calculations,” Mr Lowe said.

He continued: “In some cases, loans were being made where the borrower had only the slimmest of spare income. APRA has also introduced restrictions on growth of investor loans and restrictions on interest-only lending. This has been the right thing to do.”

Considering the reasons why individual lenders had not pulled back given trends that could enhance risk factors in the system, Mr Lowe said that when everything seems fine, individual institutions may be reticent to pull back.

He explained: “Each worries about their competitive position and about the market reaction. Individual institutions are also more likely to focus on their own risks, rather than the risks to the system as a whole. This means that supervisory measures can be useful in helping the whole system pull back.

“Ideally, such measures would not be needed, with the appropriate level of restraint coming out of lenders' holistic risk assessments. But when this does not occur, supervisory measures can play a constructive role.”

[Related: Economic shocks ‘will occur’: RBA]

RBA eyes 3% growth amid ‘troughed’ inflation

If you’re feeling overworked and overwhelmed in this fast-paced mortgage market, it’s time to make some changes, and the Business Accelerator Program can help! Early bird tickets are on sale now. Work smarter, not harder, this year.

Latest News

The prudential regulator has written to ADIs to ensure that they are proactively managing lending risks and focusing on lending standards am...

As it waits for APRA to approve its acquisition of MyLife MyFinance, Challenger has flagged plans to expand the bank’s lending remit to co...

Australia has the second-highest mortgage debt as a proportion of GDP among OECD nations, according to a new report. ...

How long do you think it should take to discharge a mortgage?

Website Notifications

Get notifications in real-time for staying up to date with content that matters to you.