The Reserve Bank of Australia boss made an extraordinary confession about the Australian economy during a speech to business leaders in Melbourne.
RBA Governor Philip Lowe delivered the keynote address at the Australian’s Strategic Business Forum in Melbourne on Wednesday morning as he faces pressure for “negligent” advice to homeowners.
Mr Lowe discussed how Australian inflation came in ahead of previous predictions – and well above his own – when he admitted he might have done things differently in hindsight.
He said it was possible the RBA provided “too much support” during the pandemic, which has contributed to higher inflation.
“Household spending, in particular, recovered from the pandemic faster than expected,” Lowe said.
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“This reflected the success of vaccination campaigns in advanced economies and the unprecedented support to household finances from fiscal and monetary policy.
“This policy support meant that, as the health situation improved, households had the confidence and ability to spend.
“The result is strong growth in aggregate demand and the emergence of tight labor markets in many countries. This has contributed to the higher inflation we are now seeing.
“Looking at this experience in retrospect, I can understand why some people might conclude that too much support has been provided by governments and central banks.
“But it’s important to remember the context in which this support was given. At the time the decisions were made, the outlook was poor.
“In Australia, tens of thousands of people were expected to die, our hospitals would become overcrowded, many people would lose their jobs and deep social and economic scars were expected. It was a very scary time.”
He said the RBA had a “strong insurance mindset”.
“In our case, we wanted to do what we could to insure Australians against the potentially catastrophic economic impact of the pandemic.
“In retrospect, you could say that we took out too many insurance policies. But that’s the nature of insurance.
“If the event against which your insured occurs, you will be very happy that you were fully insured. But if that event doesn’t happen, you question your decision and wonder if you could have saved some money.”
In a key confession, he acknowledged that while it saved jobs and protected the economy, it also contributed to inflation.
“However, I recognize that while this approach helped prevent some of the damaging long-term scarring, it contributed to the inflationary pressures we are now experiencing. We have to respond to that now,” he said.
dr. Lowe said the Reserve Bank was “patient” in withdrawing the insurance put in place during the pandemic.
‘Train Australians down the garden path’
The Forum comes at a time of great uncertainty for Australians with rising inflation and a sputtering global economy amid challenges including the ongoing pandemic and the war in Ukraine.
Rising interest rates and record gasoline prices have been hard to swallow for Aussies who are already struggling with the escalating messages.
And the RBA itself is being criticized by many who say it hasn’t handled economic conditions well — as well as a major review announced by treasurer Jim Chalmers.
Sunrise presenter David Koch was the last to pile up, telling viewers that the Reserve Bank is “training average Australians down the garden path to put themselves in debt”.
“Late last year, November-December, the Reserve Bank, Philip Lowe, told Aussies to go out and borrow, go out and borrow as much as you want, on the understanding. I’m not going to raise official interest rates until 2024,” Koch said.
“A few months later, they started raising rates. Was that advice to the average Australian negligent, were they negligent in their duty to train the average Australian down the garden path to put themselves in debt?
The RBA says things will get worse before they get better and Australians should brace for inflation well above the current rate of 5.1 percent and higher than the 6 percent forecast last month.
Mr Rowe says inflation should peak at 7 percent in the December quarter, before falling early next year.
In a statement on July 5, following the decision to raise the target for the spot rate by 50 basis points to 1.25 percent, the RBA governor said that while inflation in Australia was high, it “isn’t as high as in Australia.” many other countries. ”.
“Global inflation is high. It is fueled by Covid-related supply chain disruptions, the war in Ukraine and strong demand that is putting pressure on manufacturing capacity,” he said.
“Monetary policy worldwide is responding to this higher inflation, although it will take some time for inflation to return to target in most countries.
“Inflation in Australia is also high, but not as high as in many other countries. Global factors are responsible for much of Australia’s rise in inflation, but domestic factors also play a role.
“Strong demand, a tight labor market and capacity constraints in some sectors are contributing to the upward pressure on prices. The floods also affect some prices.”
He repeated the message that inflation “is expected to peak later this year and fall again to 2-3 percent next year”.
He said the Australian economy “remains resilient” and the unemployment rate was stable in May at 3.9 percent, the lowest rate in nearly 50 years.
Family spending, he admitted, remains a source of ongoing uncertainty.
Review ‘welcomed by Reserve Bank’
Mr Lowe closed his speech on Wednesday by acknowledging the federal government’s announcement of the details of the review of Australia’s monetary policy arrangements and the Reserve Bank.
He said the “terms of reference are appropriate and the government has appointed a first-class panel”.
“The review is also welcomed by the Reserve Bank Board and the Bank’s staff,” he said.
“It is an opportunity to take stock of our monetary policy arrangements and ensure they are fit for the challenges ahead. We look forward to participating in this process and listening to and learning from others.”
The new federal government is gearing up for a “once-in-a-generation” review of the RBA and former insiders have given a blunt assessment of the institution responsible for shaping Australia’s monetary policy.
“The board is failing, and the reason it is failing is because it has no expertise,” said Peter Tulip, former head of research at the RBA.
Mr. Tulip, who also worked for the US Federal Reserve and now works at the Center for Independent Studies, is among a group of leading economists — including former RBA board member Warwick McKibbin — who called for a major overhaul of the central bank, too. amid accusations that the nine-member board of directors lacks economic credentials.