(Image: AAP/Bianca De Marchi)

The governmental organisation in Australia that does the longest-term planning is now, apparently, the Reserve Bank (RBA).

On Wednesday, Australia’s chief central banker, RBA governor Philip Lowe, told the National Press Club that the economy was so far off track the bank would keep interest rate settings fixed at max stimulus for the next three years, and possibly longer.

It’s now talking 2024 for the timing of its next move in interest rates. That’s bloody miles away. It’s planning further ahead than the International Olympic Committee, which used to have the next 12 years locked down but now doesn’t know what’s going to happen in July.

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The RBA board will not raise interest rates until inflation is back over 2%, it has promised. And an upwards blip in inflation will not be enough to perturb this plan. Inflation needs to rise sustainably.

“It is difficult to determine exactly when this condition might be met but based on the outlook I have discussed today we do not expect it to be before 2024,” Lowe said. “And it is possible that it will be later than this.”

For a central bank, this is radically long guidance. Usually it reserves the right to change policy settings at each board meeting — of which there are 11 scheduled a year.

The 2024 deadline also represents an apparent extension of how long interest rates will be at rock bottom. When the RBA first committed to leave rates low for three years it was 2020. Instead of letting the clock run down, it is still committing to three years and suggesting it might be three years plus.

What’s the reason?

The immediate goal is to lift inflation, but the underlying goal is an improved labour market. Low unemployment and high wages growth generates widespread inflation. The reason the bank aims for inflation between 2% and 3% is that permitting higher inflation should let the labour market improve.

In one way this is a reason to celebrate. The lessons of the past 10 years have been learnt — consumer price inflation is not a risk right now. It really isn’t. On Wednesday Lowe pointed out that in other countries inflation hasn’t come about even when unemployment fell to record lows.

“Before the pandemic, when we had unemployment rates at 40- and 50-year lows in the US and the UK and actually even in New South Wales, we got an unemployment rate as low as it was in 1973. And even then wage growth was kind of two, two and a bit [percent], increasingly only very slowly,” he said.

“There’s some powerful structural factors at work, not only in Australia but globally … That means you have to have very tight labour markets and low unemployment rates to get wages increasing materially.”

This is good to hear. It means monetary policymaking authorities can learn! It might take a decade of slashing rates, but they can learn.

The last rate rise was in 2010. By the end of 2011 the RBA was retreating, having pulled policy too tight. It has now realised that to create wages growth, policy must be loose for a long time. Low interest rates create a vibrant economy that gets people into work.

But of course that’s not the only thing loose monetary policy does. It also drives up asset prices. The RBA wants this.

“Sustainable increases in asset prices support household balance sheets and encourage spending through positive wealth effects,” Lowe said. “Higher housing prices can also encourage additional residential construction.”

So far so good. But you have to be careful what you wish for. Interest rates at rock-bottom levels for four years make borrowing even cheaper. House prices could go berserk.

Crises always come from unexpected places. Are we planting the seeds of the next one in our recovery?

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Crikey is an independent Australian-owned and run outfit. It doesn’t enjoy the vast resources of the country’s main media organisations. We take seriously our responsibility to bear witness.

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Peter Fray
Peter Fray
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