Aust a better investment destination: RBA

30 Oct 2012, 7:56 pm   -   Source: AAP

Australia is better placed to deal with global economic jitters, thanks partly to being an attractive investment destination.

Australia is better equipped to deal with the effects of overseas economic problems, thanks partly to its attractiveness as an investment destination, a senior central bank official says.

Reserve Bank of Australia (RBA) deputy governor Philip Lowe also told the Commonwealth Bank's Australasian Fixed Income Conference in Sydney that the high Australian dollar had helped the country navigate though a once-a-century-investment-boom.

He said that the Australian economy had recorded solid growth, the unemployment rate remained relatively low, inflation was consistent with the target, public debt was low and the banking system sound.

"Few countries can make such claims."

He said the fact that the RBA's interest rate was above those of the other industrialised countries was helpful, especially to investment.

"The main reason for this is that the rate of return on new investment in Australia is higher than in many other countries, as evidenced by the high level of investment," he said.

"The very low interest rates in many other economies should not be seen as a good thing or something to aspire to.

"They reflect those countries difficult economic circumstances, and particularly the low risk-adjusted returns available on new investment."

Dr Lowe said this has meant that while many of the advanced economies struggled to attract investment, Australia has had the highest level of investment, relative to economic growth, in over a century, and a further increase was expected.

The RBA cash rate, of 3.25 per cent, is much higher than those of the US, Europe, the UK and Japan, all of which are below one per cent with most close to zero per cent.

The central banks of these countries cannot cut their interest rates any lower to stimulate growth and therefore buy bonds and mortgage-backed securities to free up commercial bank funds and encourage lending, a policy called quantitative easing.

Dr Lowe said this had worked, helping increase market confidence but has also driven down the yields on government bonds, which has decreased the cost of borrowing for debt-laden nations.

It had also increased investment flows into bonds markets for a higher return, that, of course, included the Australian bond market, that could boast yields of over three per cent.

"When institutions look for alternatives to holding large deposits earning a near-zero return, they look not just at domestic assets but at foreign assets as well," Dr Lowe said.

"Not surprisingly, with the rest of the world doing better than the troubled advanced economies, many of the assets earning positive risk-adjusted returns are located outside the countries undertaking quantitative easing."

  • Follow us: 
  • Follow us on Facebook
  • Follow us on Twitter
  • Follow us on Youtube