At a recent Senate hearing, Reserve Bank Governor Philip Lowe struggled to stress the need to ease business regulations and open up the economy as a way to deal with skyrocketing inflation.
“Increased competition, increased investment, and greater freedom on the supply side of the economy will reduce price pressures in particular sectors for particular levels of aggregate demand,” he said several times in 90 minutes. or repeated. hearing February 15th.
In the energy sector, the increased supply of “cheap and reliable energy” could also cause prices to skyrocket, Lowe suggested.
“Existing capital stock for producing energy is being depreciated and we are not reinvesting in existing capital,” he said.
“A long-term expansion of capital stock that produces cheap and reliable energy would help.
His comments on energy come as Australian state governments steadily shut down coal-fired power plants and instead invest billions in intermittent renewable energy.
Lowe said at the hearing that the Reserve Bank of Australia (RBA) has not ruled out further interest rate hikes.
“I don’t think we’re peaking yet. But how high do we have to go? I don’t know,” he said. “It depends on inflation data, spending resilience, the strength of the global economy, and what is happening to prices and wages.”
Governor defends interest rate hike
Lowe defended the bank’s decision to raise the official discount rate nine times in a row, despite public outcry and strong criticism from some politicians.
“The current inflation rate (7.8%) is too high. It needs to be lowered,” he said.
The governor acknowledged the risk of high interest rates slowing economic activity, but said there was also the risk that the RBA would not do enough to act. This could keep demand at a very high level and continue to provoke inflation.
Lowe then stressed the social impact of inflation and said interest rates could rise if the RBA did not take sufficient action.
“If inflation stays high, it will do a lot of damage to the economy. It will exacerbate income inequality. is,” he said.
“All the evidence is that if inflation persists too long, expectations will adjust, ultimately leading to higher interest rates and more unemployment.”
The governor said Australians seem to have forgotten the impact high inflation had on the country decades ago.
“I know it’s really hard for people to increase their mortgage payments, but if inflation is too high and stays too high, it’s going to be even harder,” he said.
“We haven’t lived in that world for 30 years, so it’s hard for people to understand.
Lowe explains factors behind high inflation
The governor said supplies were inadequate and demand remained high.
“These days demand is causing some of the inflation,” he said.
“We need a lot of public funding for health, aging, defense, disability and education.”
The governor believed demand was responsible for about a quarter to half of the rise in inflation, but about half to three-quarters of the growth was due to the war in Ukraine and global supply-side disruptions. was.
Notably, the current inflation situation is also due in part to the RBA’s overreaction during the COVID-19 pandemic, which has pushed interest rates into the system while keeping interest rates at historically low levels in response to the government’s stimulus package. It’s worth noting that he admitted to putting in a huge amount of money.
He explained why banks were told that the pandemic would last for a long time and have a much greater negative impact on the economy.
“It turned out that scientists developed a vaccine much faster and the economy was more resilient. We overdid it,” said Lowe.