RBA governor Philip Lowe signals the end of the road for interest rate cuts

Reserve Bank governor Philip Lowe has handed over the baton of economic management, declaring in a speech titled The Next Chapter that there's not much more he can do to boost the economy.

Delivering the speech in Perth, Dr Lowe said "other forces" were likely to be more important than Reserve Bank decisions about interest rates from here on.

"Monetary policy has an important role to play in supporting the economy as it goes through the current period of adjustment," he said. "It can also help stabilise the economy when it is hit by future shocks. It can make for a more predictable investment climate by keeping inflation low and stable."

"Having a competent, analytical, transparent and independent central bank can also be a source of confidence in the country.

"But beyond these effects, monetary policy has little influence on the economy's potential growth rate."

In his first year in the job Dr Lowe has kept the Reserve Bank cash rate at 1.5 per cent, the record-low he inherited.

Although by no means signalling that he was preparing to raise rates, Dr Lowe said the period of extraordinarily low global rates was drawing to a close.

"Some normalisation of monetary conditions globally should be seen as a positive development, although it does carry risks. It is a sign that economic growth in advanced economies has become self-sustaining, rather than just being dependent on monetary stimulus.

"A rise in global interest rates has no automatic implications for us here in Australia. Notwithstanding this, an increase in global interest rates would, over time, be expected to flow through to us, just as the lower interest rates have. Our flexible exchange rate though gives us considerable independence regarding the timing as to when this might happen."

What would matter most for the economy was changes in technology and growth in Asia.

"In some quarters there is pessimism about future prospects for the global economy," Dr Lowe said. "The pessimists cite demographic trends, high debt levels, increasing regulatory burdens that stifle innovation and political issues. They see a future of low productivity growth and only modest increases in average living standards.

"It is right to be concerned about the issues that the pessimists focus on, but I am more optimistic about the ability of technological progress to propel growth in the global economy, just as it has done in the past. The challenge we face is to make sure the benefits of technological progress are widely shared."

The US had a crucial role to play. A retreat from the rest of the world would make Australia's future "more complicated".

The bank was worried about low growth in incomes, something Dr Lowe identified as a problem despite a claim from Treasurer Scott Morrison that incomes were improving.

"For much of the past two decades, real national income per person grew very strongly in Australia, Dr Lowe said. "We benefited from strong productivity growth, higher commodity prices and more of the population working.

"In contrast, since 2011 there has been little net growth in real per capita incomes. This change in trend is proving to be a difficult adjustment. The solutions are strong productivity growth and increased labour force participation.

"Over the past four years, the increase in average hourly earnings has been the slowest since at least the mid-1960s. This is partly a consequence of the unwinding of the mining boom but there are structural factors at work as well. The slow growth in wages is putting a strain on household budgets."

The bank was also concerned about high household debt and housing prices. Australians were coping well, but as debt had increased relative to incomes so, too, had the medium-term risks.

Households were less inclined to let consumption growth run ahead of income. Higher debt also meant that household spending was more sensitive to interest rates, something the bank was "paying close attention to".

Peter Martin is economics editor of The Age.

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This story RBA governor Philip Lowe signals the end of the road for interest rate cuts first appeared on The Sydney Morning Herald.