Former RBA Chief Lowe Urges Policy Pause

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00:00Just talking about how Powell pushed back on the move in December, this is a cautious move.

00:06It is, you know, leaving the option is also a risk management move.

00:12That's what it is perceived as. Do you agree?

00:14A hundred percent. I mean, the world's very uncertain at the moment.

00:17The outlook for the U.S. economy and inflation is uncertain,

00:20and there are a lot of global things to take into consideration.

00:24So I think the right thing to do was to move and then to give themselves optionality for the next move.

00:31And also the trade deal, that could come out of Korea right now.

00:36I mean, how closely are you watching that?

00:37And how do you think that's influencing the minds, shaping the conversations among central bankers?

00:43Well, the trade deal or potential trade deal is incredibly important.

00:46I mean, the world has a strong vested interest in China and the U.S. getting on.

00:51But they'll both be better off if they get on, and we'll all be better off if they get on.

00:56So if they don't get on, then the global landscape looks very different.

01:01But if they do, then we can look forward to stronger growth.

01:05So it's hugely important.

01:07Of course, the Chinese economy is very much intertwined with the Australian economy.

01:11It is the largest export market.

01:12But crucially, we have been able to see China finding alternative markets, despite the tariffs imposed by the U.S.

01:22Do you think this will continue to be so for China?

01:25Well, the Chinese trade diversion is causing kind of reduced inflation pressure in Asia.

01:30There's clearly trade diversion going on.

01:32And that's kind of helpful in this part of the world.

01:37I think longer term, I'm really optimistic about China, because I'm optimistic about technology.

01:42In the end, it's technology that drives higher living standards.

01:46And China, like the U.S., is making huge investments in new technologies.

01:50And in the end, I think that will drive higher living standards.

01:53There are issues at the moment in terms of the housing market and weakness in some parts of China's manufacturing.

02:00But in the end, I'm optimistic about China, and that will be good for Australia.

02:05And if the U.S. gets on with China, it will be good for the U.S. as well.

02:08Give a time frame for that in the end.

02:10When do you see a turnaround in China's economy realistically?

02:13When can that happen?

02:14I think the property market shakeout has got a while to come.

02:17I mean, in other countries, property prices rise and they often fall very quickly.

02:21There's a financial crisis and the country moves on fairly quickly.

02:24China has taken a different approach.

02:26The property price has been falling for a number of years.

02:29They've avoided a financial crisis.

02:30But there's a lot of stress still in the system, and there's probably a shakeout to come.

02:34And while that shakeout's occurring, households don't want to spend.

02:38They don't want to invest in new property because they think the property price will be lower next year.

02:41So that process, I think, still has some way to run, and it's weighing on the Chinese economy now.

02:47But we do know that process will run its course.

02:50And Chinese people will go back to wanting buying houses.

02:52There will be positive wealth effects.

02:54And if they can get the technology right and overcome the cyclical forces from the decline in housing,

02:59I think we can look forward to better days in China.

03:01But I think it's still a couple of years away.

03:04Just like the Fed, all central banks are focused on fighting inflation.

03:09If you take a look at the RBA, we've seen how inflation surged recently out on Wednesday.

03:15And we're also seeing unemployment rising.

03:18If you were still in the chair at the RBA, would you be pausing?

03:23Would you be hiking?

03:25What would you be doing?

03:26Well, I'm not in the chair, so that's good.

03:28But the RBA recently said that it's both data-dependent and cautious.

03:32So when you take a look at data...

03:33And I think that's right.

03:34And the inflation data has spoken, hasn't it?

03:37The inflation was quite a lot higher than they expected.

03:41And I would imagine that the cautious approach then is to leave interest rates where they are for a while

03:46and just to see whether this is an aberration or whether it's more persistent.

03:50So the data's spoken.

03:52And I think the cautious thing to do would be to sit still for a while and see how things develop.

03:57Is the easing cycle likely over for the RBA?

04:00What's the sense you're getting?

04:02Given the data that...

04:03Yeah, I don't think so, because the RBA says, and I think this is correct,

04:08that monetary policy is still mildly restrictive.

04:11But the underlying issue, I think, is that unit labour cost growth is too high.

04:15It's been running kind of close to 5% for a number of years.

04:19And if you keep on having unit labour cost growth of 5%, you don't get 2.5% inflation.

04:24So unit labour cost growth has to slow.

04:27It's best if it slows through productivity growth picking up

04:30so that people can have strong wage increases back by productivity increase.

04:35But if that doesn't happen, then nominal wage growth has to slow.

04:40And that probably requires tight monetary policy for a while.

04:44So for me, this is the big uncertainty.

04:47What is growth in unit labour cost going to be going forward?

04:49And while I work that out, it's best to sit still just in case it doesn't slow.

04:54What's the outlook for the Australian economy in your mind?

04:56And what's the biggest risk?

04:57The economy is growing at 2%.

05:00It seems to have settled into 2% growth path.

05:04The fundamentals are really positive because you've got strong population growth,

05:07AAA credit rating, great natural resources, fantastic education system

05:11and a dynamic and innovative workforce.

05:13So the fundamentals are kind of a positive.

05:16The issue is that business investment has been weak for a number of years

05:20and it's not keeping pace with the growth in the population.

05:25Population's rising 2% a year.

05:27The capital stock is not.

05:29So the capital stock is under pressure and that's contributing to weak productivity growth.

05:34So that's the big issue, how to re-enliven business investment

05:39so the country's capital stock starts rising again to match the strong population growth.

05:44If it doesn't, then living standards will stagnate.

05:47But if it does, then the Australian economy can do better than 2%

05:51because we've got fantastic fundamentals.

05:54We've got to get business investment re-energised.

05:57We're having this conversation against a backdrop of complexities for central banks.

06:03Their independence is greatly in question, not just the US,

06:07but also in countries closer to us like Indonesia, like Thailand.

06:11Is this the new normal for central banks?

06:15Well, central banks have always lived in a complex world.

06:18I remember in my times in central banks, we've had the Asian financial crisis,

06:22the global financial crisis, COVID, domestic resources boom, exchange rate boom, and then...

06:28But the independence has always been intact and now it is in question.

06:31I think that's key.

06:31In Australia, the independence of the central bank is not under question.

06:37We had a review a number of years ago.

06:39It led to some changes, but fundamentally that review reinforced the independence

06:43of the central bank and the operating framework.

06:47How might this shake out for the world, given that it is in question,

06:50in a country like the US?

06:54I'm not...

06:54I mean, it's worry that politicians attack central banks,

06:58but they've always done that.

06:59But I'm not too worried that attacks by politicians on the central banks

07:05will ultimately lead to higher inflation

07:06because markets are a really powerful, disciplined device.

07:09If a central bank starts going off track, bond yields go up,

07:13the currency goes down, the share market goes down,

07:15and so that's kind of a self-correcting device.

07:18And the other thing that helps a central bank,

07:21would help a central bank if it's going off track,

07:23is the public distaste for inflation.

07:25The last few years have reminded people just how costly

07:29inflation is.

07:30People don't like it.

07:32So if a central bank starts implementing policies

07:34because the politician wants them to and inflation starts to rise,

07:38there'll be a backlash, a market backlash and a society backlash.

07:42So as long as you've got a clear operating framework,

07:45decent people at the central bank, market discipline,

07:47and a public distaste for inflation,

07:49I can't see inflation rates rising persistently in Western countries.

07:53The independence of the Fed has a bearing on the USD,

07:57and some say that if we see a weakening of that independence,

08:01the dollar is headed lower.

08:04How are you looking at that?

08:07Well, if you see a weakening of the independence of the Fed

08:09and you thought there was going to be higher inflation,

08:11then the US dollar should depreciate.

08:13But I don't see the US going into a persistently high inflation world

08:18because of the factors that I just spoke about.

08:20But the US dollar, it would not surprise me

08:25if that were to continue on its weakening trend

08:26because of the changes that the US administration have made

08:30have kind of weakened people's confidence in the United States.

08:33And if you have weaker confidence, you have weaker currency.

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