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Australia central bank deputy governor warns of risks in low-rate world

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Very low global interest rates are likely to persist for some time yet and investors, in their chase for yield, need to be wary of the risks in pushing asset prices too far ahead of economic fundamentals, a top Australian central banker said on Tuesday. - PHOTO: AFP

[Sydney] Very low global interest rates are likely to persist for some time yet and investors, in their chase for yield, need to be wary of the risks in pushing asset prices too far ahead of economic fundamentals, a top Australian central banker said on Tuesday.

Reserve Bank of Australia (RBA) deputy governor Philip Lowe told a conference that while some financial risk-taking was desirable the longer it ran on without complementary pickup in real investment, the greater was the potential for new risks to develop. "During this period, while we wait for the investment environment to improve, we need to be cognisant of potential risks of asset prices running too far ahead of real activity. This is true in Australia, as it is elsewhere around the world,"he said.

Mr Lowe said a question being discussed internationally and at home was whether the recent increase in house prices in parts of the world, together with pockets of higher borrowing, was generating increased financial and macroeconomic risk. "Lenders need to ensure that their lending standards remain sound and that they hold the appropriate amount of capital against the risks they face. And investors need to evaluate developments in the broader market, including how their investments might turn out in less benign scenarios," he said. "Careful attention to these issues will help ensure that in getting the economic benefits of low interest rates we do not generate unacceptable risks on the financial side." Australia's cash rate is at a record low 2.5 per cent, where it has been since it was last cut in August 2013. Elsewhere in the world, rates are even lower. In the United States, Britain, euro zone and Japan, they are practically at zero.

Mr Lowe lamented that many investors remained very cautious when considering funding business expansion and aggregate investment remained low. "In response, central banks have felt that they have had no choice but to continue with very expansionary policies and, in some cases, to add yet further stimulus." "The hope is that in so doing, they will eventually induce a shift from the world of strong demand for existing assets to one in which there is strong demand for new assets that will create the growth and jobs that are so badly needed." Mr Lowe said ultimately, monetary policy alone cannot drive the higher ongoing expected returns on capital that are required for sustained economic growth and for reasonable long-term returns to savers. "It is instead government policy - including in some countries, increased spending on infrastructure - that has perhaps the more important role to play here."

Mr Lowe said the promotion of real risk-taking and increased spending on infrastructure are central in delivering on the G20 commitment to lift global gross domestic product growth by an additional 2 per cent by 2018. REUTERS