Reserve Bank Governor Philip Lowe was at pains to emphasise the need to relax business regulation and open up the economy as the way to deal with soaring inflation during a recent Senate Estimates hearing.
In the energy sector, Lowe suggested an increase in “cheap, reliable energy” supply would also bring down skyrocketing prices.
“The existing capital stock to produce energy is depreciating, and we are not reinvesting in existing capital,” he said.
“Overtime expansion of the capital stock that produces cheap, reliable energy will help. We need the capital stock to be put in place in the country to deliver that.”
His comments on energy come as Australian state governments steadily turn off coal-fired power plants to instead invest billions into intermittent renewable energy.
During the hearing, Lowe said the Reserve Bank of Australia (RBA) did not rule out further raising interest rates.
Governor Defends Interest Rate Rises
Lowe has defended the bank’s decision to lift the official cash rate nine consecutive times despite public outcry and strong criticism from some politicians.“Inflation at the moment–7.8 percent–is way too high. It needs to come down,” he said.
The governor acknowledged that there was a risk of high-interest rates dampening economic activity but said there was also a risk of the RBA not doing enough, which could simply leave demand at sky-high levels that would in turn continue driving inflation.
Lowe then highlighted the impact of inflation on society, saying if the RBA did not take enough action, higher interest rates could be on the way.
“If inflation stays high, it’s very damaging for the economy. It worsens income inequality. It makes it harder for businesses to plan. It erodes the value of people’s savings. It’s corrosive,” he said.
“All the evidence is that if inflation stays high for too long, expectations adjust and that ultimately leads to higher interest rates and more unemployment.”
The governor said Australians seemed to forget the impact high inflation had on the country decades earlier.
“I know it’s really hard for people to pay more on their mortgages, but it'll be harder still if inflation gets too high and stays too high,” he said.
Lowe Explains the Drivers Behind High Inflation
The governor said supply was insufficient, which led to demand staying high.“Demand is driving part of the inflation most recently,” he said.
“There are a lot of demands of the public purse from health, aging, defence, disability, education.”
The governor believed demand was responsible for roughly a quarter to half of the increase in inflation, while around half to three-quarters of the growth was due to the war in Ukraine and global supply-side disruptions.
Notably, Lowe admitted that the current inflationary situation was also partly caused by RBA’s overreaction during the COVID-19 pandemic, where it pumped huge amounts of money into the system—in response to government stimulus—while also keeping interest rates at historic lows.
He reasoned the bank was advised that the pandemic would last for a long time with a much more detrimental impact to the economy.
“It turns out that the scientists developed a vaccine much more quickly, and the economy was more resilient, and we did too much,” Lowe said.