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RBA singles out housing to drive economy

The Reserve Bank of Australia has flagged the “substantial lift” in housing construction as evidence that monetary policy in Australia is still working to help support the national economy.

The number of dwelling approvals reached a record 19,282 in January, according to the Australian Bureau of Statistics.

That marked a 9.1 per cent increase on the previous year and a 5.7 per cent increase on the previous record result of 18,245 seen in November 2014.

In a speech to the Goldman Sachs Annual Global Macro Economic Conference in Sydney last week, RBA deputy governor Philip Lowe said this increased activity is boosting employment in the sector and having flow-through effects on spending on homewares and related items.

The exchange rate channel of monetary policy is also working, he noted.

“There are some signs that the depreciation of the Australian dollar is boosting domestic activity, with net exports of services increasing strongly,” Mr Lowe said.

“Also, in our liaison program, a number of businesses have reported that they see the lower exchange rate as opening up new opportunities.

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“In time, we should see the effect of this on domestic production and spending.”

Mr Lowe admitted that since the global financial crises monetary policy has not worked as effectively as in previous years and that consumer behaviours have shifted and become increasingly conservative.

In Australia, this has been most evident in the propensity for consumers to save rather than invest, despite a low interest rate environment, he said.

“While it is not possible to be definitive, there are reasonable grounds to believe that the behaviour of both borrowers and savers might have changed a little,” Mr Lowe said.

“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. Certainly, the many letters we have been receiving at the Bank recently would suggest this,” Mr Lowe said.

Unfortunately, one of the consequences of a world in which many more people want to save than to invest is that the return to saving falls, particularly on savings held in low-risk assets such as bank deposits.

“The low interest rates we are seeing globally and in Australia are a direct consequence of an elevated appetite for saving and a muted appetite for real investment in many economies," he said.

“Monetary policy globally has responded to this reality in a way that a decade or so ago would have hardly seemed imaginable. In doing so it has helped the global economy through a very difficult period.

“But, 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, he said.

Commenting on the RBA board decision to leave the cash rate unchanged at 2.25 per cent last month, Mr Lowe indicated he believed that further easing may be appropriate in the period ahead.

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