Australia’s Central Bank Chief Warns of Economic, Financial Effects of Climate Change

By Michael Heath | February 14, 2020

Australia’s central bank chief Philip Lowe warned of wide-ranging economic and financial impacts from climate change, after his drought-stricken nation suffered some of its worst wildfires ever.

Speaking on a panel with his Canadian counterpart, Lowe pointed out that drought would cut Australia’s GDP growth by a quarter percentage point this year, and the blazes would shave 0.2 percentage point from growth in the final three months of 2019 and the current quarter.

“The economic implications are profound,” the Reserve Bank governor told the Australia-Canada Economic Leadership Forum Thursday in Melbourne. “The world is getting hotter and the climate’s more variable, and we’re seeing already in Australia, perhaps more than anywhere else in the world, the effects of that.”

Australia is the world’s driest-inhabited continent and experiences wildfires to some extent every year, but the scale of the crisis this season has been extraordinary. More than 30 people died as flames scorched an area the size of England.

Philip Lowe, governor of the Reserve Bank of Australia (RBA), appears before the House Economics Committee at Parliament House, Canberra, on Friday, Feb. 7, 2020.
Photo credit: Mark Graham/Bloomberg.

“Climate change is affecting the nature of production in Australia, the nature of investment, ultimately the nature of our exports, at the moment I think it’s affecting confidence in people and therefore ultimately spending,” Lowe said. “It’s affecting the availability and pricing of insurance, these extreme weather events, and it’s affecting how we generate and distribute power.”

Lowe said the RBA is trying to understand “the full dimensionality” of the economic effects of climate change and how it could flow through to the bank’s financial stability mandate.

“If you accept the proposition the effects are profound, then it’s going to affect asset values,” he said. “The possibility of stranded assets and if assets aren’t stranded then some are going to be worth less. And, importantly, other assets are going to be worth more.”

Lowe expects better guidance with energy policy would assist businesses’ investment decisions. “There’s been very substantial investment in renewables in Australia,” he said. “We have fantastic opportunities there to reshape our energy production system. Investment is taking place, but it would be enhanced by greater policy certainty.”

The RBA chief also blamed subdued private sector investment on excessive risk-return expectations that corporate Australia has been reluctant to adjust despite the new world of lower interest rates.

Meanwhile, the governor listed the search for higher yield in the low-rate environment and elevated household debt as additional financial stability vulnerabilities.

Lowe attributed the “structurally high” levels of debt to the relative ease of accessing credit and Australians’ preference toward living in detached housing in major cities.

“We’re conscious in our interest rate decisions that when we cut interest rates from cyclical perspectives it encourages people to borrow even more from an already high level of debt because of these structural reasons,” he said. “It’s a consideration in our decisions at the moment.”

The RBA has kept the cash rate unchanged at its past three meetings, including last week when the central bank said the risks of lowering rates outweigh the benefits.

–With assistance from Matthew Burgess.

Photograph: A firefighter walks past burning trees during a battle against bushfires around the town of Nowra in the Australian state of New South Wales on Dec. 31, 2019. Thousands of holidaymakers and locals were forced to flee to beaches in fire-ravaged southeast, as blazes ripped through popular tourist areas leaving no escape by land. Photo by SAEED KHAN/AFP via Getty Images.

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