Australia’s economic prosperity relies on people being able to trust banks and financial institutions, the head of the central bank has declared.
People must also be able to trust their living standards will get better over time, Reserve Bank of Australia Governor Philip Lowe has stressed in an address in Sydney.
“Our economy, and our society, works best when there are high levels of trust,” Dr Lowe told the Committee for Economic Development of Australia dinner on Tuesday.
“And those in whom trust has been placed need to do their best to be worthy of that trust.”
Australian banks have a strong record of being worthy of the trust placed in them to repay deposits, Dr Lowe said.
But he said the poor behaviour highlighted by the banking royal commission has dented trust in other parts of the sector.
Turning thing around will require banks to better deal with conflict of interest issues, do away with poorly-designed incentive systems and better hold misconduct to account, he said.
Dr Lowe said a strong culture of service is also needed within financial institutions, stemming from systems set by boards and managers.
“Changes that are now taking place within the financial sector should, over time, help restore trust, although it is likely to be a gradual process,” he said.
Aside from Australians being able to trust in their banks, the RBA boss has highlighted the importance of people being able to trust that their living standards will improve over time.
Between 1995 and 2012, real hourly wages grew significantly but the same can’t be said of the past six years, during which rising wages have been matched by inflation.
This change has helped created jobs but has also prompted Australians to question if they are benefiting from the nation’s economic growth.
Dr Lowe said this diminished trust is a “major economic, social and political issue” that has contributed to political changes globally.
Strengthening that trust won’t be easy but can be done by further tightening the labour market and boosting productivity, including by investing in education, skills, research and development, he said.
“We all have a strong interest in that trust being restored. Without it, a lot of things become more difficult.”
The governor also emphasised the need for institutions such as RBA to hold the public’s trust, including through transparency.
The RBA also on Tuesday released its latest minutes on monetary policy, suggesting the Australian economy has been doing well recently.
The pace at which people are spending is a source of uncertainty going forward, and the RBA is closely watching declining house prices in Sydney and Melbourne.
The board still doesn’t believe there’s a strong case for lifting the official cash rate from 1.5 per cent in the near future.
But the time will come at some point if the economy moves along its expected path, with growth and household incomes rising.