By Jacob Greber March 10 (Bloomberg) — Australia’s economy is likely to expand at or above its average pace over the next few years, stoking inflation pressures and house prices, central bank official Philip Lowe said. “We will need to keep a strong focus on improving the supply side of the economy so that demand can grow solidly without putting upward pressure on inflation ,” Assistant Governor Lowe said in Sydney today. “We also face the significant challenge of increasing the supply of housing at a time when business investment is also very high.” Reserve Bank of Australia policy makers led by Governor Glenn Stevens last week raised borrowing costs for the fourth time in five meetings to ensure the nation’s faster-than- forecast economic rebound doesn’t push inflation above their target range of 2 percent to 3 percent. Unlike other advanced economies, Australia’s consumer price gains aren’t expected to stay below the target for an extended period, Lowe said. “The central scenario for the Australian economy is a positive one with growth over the next couple of years at, or above, average, a relatively strong labor market, and inflation consistent with the medium-term target,” Lowe, who heads the central bank’s economic analysis and research departments, told a gathering of the Urban Development Institute of Australia. The assistant governor also said a proposal by senior staff at the International Monetary Fund for central banks to raise their inflation targets to 4 percent “does not seem particularly sensible.” History Lessons “As history has taught us, inflation distorts decision- making in the economy, discourages saving, and increases uncertainty about the future,” Lowe said. “Ultimately higher inflation means higher nominal interest rates.” Lowe’s remarks echo Governor Stevens’ view that the nation’s economy has been growing for some months at or close to “trend,” as a surge in Asian demand for minerals and energy prompts companies such as Chevron Corp. and BHP Billiton Ltd. to boost hiring and investment in new resources projects. Stevens increased the overnight cash rate target on March 2 by a quarter point to 4 percent, adding to similar moves in December, November and October. He is the first policy maker from a Group of 20 nation to raise borrowing costs this year. Gross domestic product grew last quarter at the fastest pace in almost two years, rising 0.9 percent from the three months through September, and advertisements for job vacancies jumped in February by the most in more than a decade, according to reports published in the past week. Spare Capacity “Australia starts the current expansion with considerably less spare capacity than earlier thought likely, and with less than at the starting point of previous expansions,” Lowe said. Employers added 194,600 jobs in the five months through January, the biggest increase in more than three years, driving the unemployment rate to an 11-month low of 5.3 percent, which is almost half the level in the U.S. and Europe. Another 15,000 jobs were created in February, a report will show tomorrow, according to the median estimate of 25 economists surveyed by Bloomberg News. Investment and productivity growth are the “obvious keys” to enable domestic demand to expand without causing inflation to accelerate, the assistant governor said. Business investment is currently equivalent to around 16 percent of GDP, which is “not far below its peak level in the past four decades and is expected to rise a little further over the next couple of years,” Lowe said. ‘Bear Fruit’ The capital spending is “starting to bear fruit” among mining companies where “significant increases in resource exports are expected,” he said. Business confidence increased in February for a second month, matching November’s seven-year high, according to a National Australia Bank Ltd. survey published yesterday. “Given that countries with relatively high returns on capital typically have relatively high real interest rates, it should not be surprising that interest rates in Australia are above those in other countries where the return on capital is currently much lower,” Lowe said. Australia also faces the challenge of building more homes to satisfy demand from a growing population, which has been increasing recently at around the fastest pace in 50 years, according to the central bank. “With population growth above average, and the growth in housing stock below average, it is not surprising that there has been upward pressure on housing costs,” Lowe said. House Prices House prices surged 11.8 percent in the year through January, according to a Feb. 26 report by real-estate monitoring company RP Data-Rismark. One issue will be whether Australia can deal with an increase in dwelling construction at a time when investment elsewhere in the economy is “also very high,” Lowe said. “If housing construction is very strong at the same time that the resources sector is expanding, there will be competing demands for a range of skilled workers and specialized services,” he said. “Managing these competing demands and ensuring the adequate supply of workers with appropriate skills will be a challenge.” To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net
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Australian Economy Will Grow Faster Than Average, Reserve Bank’s Lowe Says
