Call to action by the Reserve Bank Governor

Speech by Reserve Bank Governor

• The Reserve Bank Governor Glenn Stevens delivered a speech “Economic Possibilities”

A coach rallies his players

• The Reserve Bank Governor has delivered a powerful speech that could only be described as a “call for action”. And the speech was clearly targeted at the conservativeness of the business sector – a theme that the Governor has been focussing on for some time. It is a detailed speech. It applauds Australia’s successes. It implores Australian business people to believe in themselves and take greater risks. It was the type of speech that a coach delivers to his players. It is definitely a speech worth reading.
• The conclusion to the speech pulls no punches: “maximising our economic possibilities in the modern world requires sustained efforts at adaptation and innovation, at doing things better and, perhaps most of all, a willingness to take the occasional risk. I would be confident that we have, or can develop, the relevant capabilities. The only question is whether we are sufficiently determined to succeed in deploying them.”
• Stevens effectively delivers a pep talk. He praises the response by business to the changing structure in the economy by lifting productivity, “The good news is that businesses can respond to that, and they are doing so.”But Stevens says that the process needs to continue. But he questions “whether our overall business environment is conducive enough to risk-taking and innovation, and whether we are doing enough to develop the relevant competencies.”
• But in responding to the issue of “whether we have the competencies, across multiple dimensions, to be effective in the modern global economy?” Stevens effectively responds in the affirmative by lauding Australia’s success in hosting the G20. “The feedback I have received from my counterparts has been universally and strongly positive. They judge that the Australian presidency has, by the metrics that count, been very successful.”
• And the pep talk continues: “It wasn’t achieved by any effortless superiority; it owed to careful preparation, astute use of some of our natural advantages and continuous effort over a long period. But that’s where success always comes from, really. The only question is: how badly do we want it?”
• Stevens notes Australia’s success in putting the issue of infrastructure on the table, and again the “coach” calls for action: “There is an opportunity here, including for Australia, to do something of value over the years ahead. Of course, we will need to be serious and to put in the effort over an extended period – in all the above areas. If we don’t put in that effort, not much actual infrastructure will be delivered. But if we are serious, a lot could be achieved.”
• The Reserve Bank Governor attempts to set the record straight with his views on housing.
• “Credit outstanding to households in total is rising at about 6–7 per cent per year. I see no particular concern with that.”
• “It is not clear whether price increases will continue or abate. Furthermore, it is not to be assumed that investor activity is problematic, per se. A proportion of the investor transactions are financing additions to the stock of dwellings, which is helpful. It can also be observed that a bit more of the ‘animal spirits’ evident in the housing market would be welcome in some other sectors of the economy.”
• “Nor, let me be clear, have we seen these dynamics, thus far, as an immediate threat to financial stability. The Bank’s most recent Financial Stability Review made that clear. So we don’t just assume that all this is a terrible problem.”
• The Reserve Bank Governor does acknowledge that there are signs in the investor housing market where“some people might be starting to get just a little overexcited.” The Reserve Bank is working with other agencies on reviewing lending standards. But he makes clear the purpose of the review. “Let’s be clear what this is not about. It is not an attempt to restrain construction activity. On the contrary, it is an attempt to stretch out the upswing. Nor is it a return to widespread attempts to restrict lending via direct controls.”
• The Reserve Bank Governor makes it clear that rates aren’t set to rise to address the strong growth in investor housing lending: “The economy has spare capacity. Inflation is well under control and is likely to remain so over the next couple of years. In such circumstances, monetary policy should be accommodative and, on present indications, is likely to be that way for some time yet. But for accommodative monetary policy to support the economy most effectively overall, it’s helpful if pockets of potential over-exuberance don’t get too carried away.”
• The aim of the Reserve Bank is not to snuff out the lift in housing lending and thus lift in construction, rather it is to extend it: “A sustained period of strong construction will be more helpful from the point of view of encouraging growth in non-mining activity – and also, surely, from a wider perspective: housing our growing population in an affordable manner.”
• The clear take-aways from the Reserve Bank Governor’s speech:
• Australians should take pride in the successful hosting of the G20. And Australia should focus on the success achieved in lifting productivity growth. But we shouldn’t rest on our laurels but rather should be determined to build on our successes. “The only question is: how badly do we want it?”
• The Reserve Bank Governor stresses: “if we are serious, a lot could be achieved.”
• The Reserve Bank Governor wants to extend the lift in home construction as a means of lifting non-resource investment and housing our population. But he also wants to ensure that any signs or investor over-exuberance are contained.

Some salient points about housing

The Reserve Bank Governor attempts to set the record straight with his views on housing.

• “Credit outstanding to households in total is rising at about 6–7 per cent per year. I see no particular concern with that.”
• “It is not clear whether price increases will continue or abate. Furthermore, it is not to be assumed that investor activity is problematic, per se. A proportion of the investor transactions are financing additions to the stock of dwellings, which is helpful. It can also be observed that a bit more of the ‘animal spirits’ evident in the housing market would be welcome in some other sectors of the economy.”
• “Nor, let me be clear, have we seen these dynamics, thus far, as an immediate threat to financial stability. The Bank’s most recent Financial Stability Review made that clear. So we don’t just assume that all this is a terrible problem.”

The Reserve Bank Governor does acknowledge that there are signs in the investor housing market where“some people might be starting to get just a little overexcited.” The Reserve Bank is working with other agencies on reviewing lending standards. But he makes clear the purpose of the review. “Let’s be clear what this is not about. It is not an attempt to restrain construction activity. On the contrary, it is an attempt to stretch out the upswing. Nor is it a return to widespread attempts to restrict lending via direct controls.”

The Reserve Bank Governor makes it clear that rates aren’t set to rise to address the strong growth in investor housing lending: “The economy has spare capacity. Inflation is well under control and is likely to remain so over the next couple of years. In such circumstances, monetary policy should be accommodative and, on present indications, is likely to be that way for some time yet. But for accommodative monetary policy to support the economy most effectively overall, it’s helpful if pockets of potential over-exuberance don’t get too carried away.”

The aim of the Reserve Bank is not to snuff out the lift in housing lending and thus lift in construction, rather it is to extend it: “A sustained period of strong construction will be more helpful from the point of view of encouraging growth in non-mining activity – and also, surely, from a wider perspective: housing our growing population in an affordable manner.”

The bottom line

The clear take-aways from the Reserve Bank Governor’s speech:

• Australians should take pride in the successful hosting of the G20. And Australia should focus on the success achieved in lifting productivity growth. But we shouldn’t rest on our laurels but rather should be determined to build on our successes. “The only question is: how badly do we want it?”
• The Reserve Bank Governor stresses: “if we are serious, a lot could be achieved.”
• The Reserve Bank Governor wants to extend the lift in home construction as a means of lifting non-resource investment and housing our population. But he also wants to ensure that any signs or investor over-exuberance are contained.