Speech Summary Investing in a Low Interest Rate World

The speech outlines some of the challenges faced in a world of low interest rates and focuses on two issues: how greater financial risk-taking can be transformed into greater risk-taking on the ‘real’ side of the economy, and recent developments in the Australian housing market.

The speech looks at attitudes towards risk over recent years. It explains that since the financial crisis, in a low interest rate environment, investors have begun to increase their financial risk-taking and purchase existing physical assets as they search for higher yields. However, it notes that the strong demand for assets and resulting price increases has not yet generated a strong appetite for the creation of new assets (which are needed to create growth and jobs). As such, central banks are said to have continued to implement expansionary monetary policies with the objective of supporting demand and encouraging investment in new assets that will support economic growth.

The speech then highlights two approaches to promote economic growth – the promotion of structural policies that encourage risk-taking in the real economy and increased spending on infrastructure. The challenges in financing infrastructure investment are then explored. And from a domestic perspective, the speech outlines how higher infrastructure spending could support the transition from the mining investment boom to other forms of activity.

The speech then turns to the Australian housing market and explains that increased demand for housing is translating into increased demand for new housing construction, which is assisting with the rebalancing of demand in the economy (as mining investment declines). However, the speech warns that some aspects of the housing market, such as loans to investors, have become ‘unbalanced’. It suggests that this sort of imbalance poses the risk of unsustainable housing price growth, which, if it were to correct suddenly, could have consequences for the economy. And the speech notes that the Bank has said that it is talking to the prudential regulator about possible ways to temper growth in this segment of the market.

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