Reserve Bank of Australia Governor Philip Lowe has lashed out at Australia’s banking system, telling a Parliamentary committee he has been “appalled” by the behaviour revealed in the banking royal commission.
In his wide-ranging testimony to the House of Representatives standing committee on economics on Friday, the central bank chief also called on Australians to keep the recent housing price slump in perspective, and slammed the economic policies of US President Donald Trump.
Financial services have been a key contributor to Australia’s economic growth, Lowe acknowledged, but the faith in the system has been shaken by the damaging revelations at the royal commission.
“In many cases it shows the benefit of sunlight. Sunlight is acting as a very good disinfectant here,” he said. “I’m incredibly disappointed and in many cases I have been appalled at the behaviour that has come out of the royal commission.”
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He said underlying fiduciary interests must be top of mind of executives, and trustees had to act in the best interests of their customers. Instead, “top of mind has been maximising financial returns and that is very problematic”, he said.
The central bank chief noted the royal commission had also impacted house prices, with banks tightening their lending standards in response to tighter scrutiny – but the real house price story was one of demand, he said.
Lowe told anxious homeowners, analysts and policymakers to keep things in perspective.
“Not so long ago, there was concern in the community about rapidly rising housing prices and declining housing affordability. These earlier trends were not sustainable and were posing a medium-term risk to our economy,” he said.
“The housing markets in Sydney and Melbourne have clearly slowed and prices are coming down. While this has concerned some people, we need to keep things in perspective.
“It is good news that this adjustment is taking place at a time when global growth is strong, the labour market is positive and interest rates are low.”
Lowe cautioned a relatively positive domestic outlook could be muted by turbulent headwinds overseas.
TRUMP’S ‘HIGHLY UNUSUAL’ ECONOMICS
The central bank governor took a thinly veiled swipe at Trump’s economic policies.
Washington has sought to boost the US economy through aggressive company tax cuts and hundreds of billions of dollars in military and infrastructure spending at a time of near full employment and historically high levels of debt.
“At this point in the cycle it should be about repairing the budget deficit,” Lowe said. “The US is doing exactly the opposite.”
The combination of full employment and fiscal stimulus could push up inflation beyond sustainable levels, and force the US Federal Reserve to hike rates quicker than anticipated, with potential ripple effects on overseas markets. Yet financial markets remained surprisingly relaxed about the implications of the Trump policies for inflation, he said.
“I have to say I am less relaxed: it is highly unusual to have such stimulatory fiscal policy when the economy is already operating at a very high level of capacity,” warned Lowe.
“One can’t rule out the possibility that the Federal Reserve will have to withdraw monetary accommodation more quickly than currently projected.”
He said escalating trade tensions between the US and China could also cause businesses to delay investment because of additional macroeconomic uncertainty.
“This could be the channel through which the trade tensions sap the current positive momentum in the global economy,” he said.
“I can’t think of a single country that has made itself wealthier by building barriers. I can think of a lot that have made themselves wealthier by inviting others in.
“I think one country has done particularly well from that: Australia”.
As the father of teenage children, Lowe said he was worried about intergenerational equality being crimped by debt.
He warned strong economic management had put Australia in a good position but after more than 25 years of uninterrupted growth, now was the time to start building up buffers to economic shocks.
“One day we will have a recession, it will come as a shock to people,” he said. “When that day comes, if the government is going to have that capacity [to inject spending], it needs to run a disciplined budget.”
He reiterated that if current trends continued, the next move in interest rates would be up. This would be “a significant change for many people” who have not seen a rate rise since 2010.
In the unlikely event that interest rates were cut from their record low of 1.5 per cent, it would most likely be due to global events, particularly a slow-down in China, he said.
“It is a low-probability, but it is a possibility,” he said.
– Sydney Morning Herald
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