Former Reserve Bank governor Philip Lowe sat down with The Australian recently to discuss interest rates, productivity and building Australia’s wealth.
In the interview, Lowe discussed how decade-high interest rates were not to blame for Australia’s cost of living problem.
The Reserve Bank of Australia cut the interest rate to 4.1% two weeks ago – the first rate cut since November 2020.
“It’s not interest rates. Interest rates have probably suppressed aggregate demand by 1% this year,” Dr Lowe said.
“The lack of productivity over that time has suppressed demand now by 9% (today). So that’s the source of the problem.”
According to Dr Lowe, the productivity problem crippling the country is a “political” issue rather than economic.
“We’ve had our living standards rising quickly for decades and that’s no longer happening, and people are getting unhappy about it,” he said.
“The problem isn’t an economic one, we kind of know broadly what to do.
“It’s a political one – our society has lost the ability to form coalitions to implement difficult things that in the short run will hurt some people but are good for our kids. And we’re now seeing the consequences.”