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RBA's Harper says best to 'just sit' on Aussie interest rates

Wednesday, March 15, 2017 - 15:01

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Reserve Bank of Australia board member Ian Harper said interest rates should remain on hold for now and stable inflation remains of "primal importance" to him.

[SYDNEY] Reserve Bank of Australia board member Ian Harper said interest rates should remain on hold for now and stable inflation remains of "primal importance" to him.

"It is not the right time to raise rates and it's not the right time to lower rates. So we just sit," Mr Harper said in a phone interview from Melbourne Wednesday. "In order to decide otherwise, my colleagues and I will need different sorts of information coming in." He didn't elaborate further.

Mr Harper takes his cue on consumer prices from the RBA's charter as an inflation-targeting institution, while also considering over what time period the central bank's 2 per cent to 3 per cent target can be achieved and at what cost. But he shares a similar outlook to Philip Lowe in saying he's no "inflation nutter" - recycling the Governor's own phrase from last year.

"I am somebody who, yes, believes in the primal importance of a stable rate of inflation," said Mr Harper. "Not necessarily a stable price level. But predictable stability in inflation. Why is that? Because it's the basis upon which we reckon value. And it's the basis of trade that we can at least have confidence in the level of the currency." Mr Harper, who began his five-year term on the RBA's board at the end of July, is one of six independent directors among the nine-member panel that also includes the governor, Deputy Governor Guy Debelle and Secretary to the Treasury John Fraser. Three days after Mr Harper joined the board last July the central bank cut rates to a record-low 1.5 per cent, its last easing; a few weeks later Mr Lowe succeeded Glenn Stevens and policy has been left unchanged since.

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Mr Harper approaches his role by making inflation a priority, and then broadening his considerations to include financial stability, housing markets, growth, employment and wages. He cited economist and author of Principles of Economics Alfred Marshall that "it's all a seamless garment." "You have to walk into this moving stream somewhere," said Harper, who is also a senior adviser at Deloitte Access Economics Ltd. "We walk in at the inflation ramp."

Australia's inflation rate has held below the lower end of the target for the past nine quarters as wage growth has slowed to a crawl in an economy adjusting to the end of a mining investment boom. Another issue is the loss of almost 80,000 full-time jobs since the start of 2016 while 185,000 part-time roles were created, leaving high under-employment and meaning there's little appetite for wage demands.

Mr Harper remains confident wage gains will revert to normal in time.  "My sense is that it is still cyclical, it's coming out of the winding down of what's happening in the mining industry," he said, stressing these were personal views rather than the central bank's. "But as that process continues, does that mean we're all on a lower trajectory going forward? No I don't think that's the case at all." While Australia's productivity is picking up, the country needs to drive harder on policy changes for growth to accelerate, said Mr Harper, who chaired a competition review for the government. "As productivity grows, it will take wages with it," he said. "Not immediately, but after a while." He's more concerned about "cashed-up" businesses failing to invest. Harper cites political uncertainty, which he says is always there; he acknowledges a lot of nervousness about the U.S.

"I think a lot of businesses are concerned about the outlook for their own markets," he said. "If you're facing massive disruption in the traditional ways you've done business, you don't need to be concerned about the Trump administration or what the Germans might or might not do for the Greeks in Europe to be very, very concerned about where you put your next dollar."

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