Does RBA really need to cut rates further?

Australian Conservatives Release

There is mounting evidence that the RBA need not reduce interest rates to kick-start our housing market and broader economy and that a rate reduction, or two, could well be harmful overkill.

The Conservative Party is conscious that an overheated Australian economy would not be in Australia’s best interests and urges caution on reducing interest rates too far.

Labor, with its destructive negative gearing and Capital Gains Tax policies, were expected to win the election from a long way out, certainly since August last year, and even arguably since mid-late 2017 when the Turnbull Govt was facing its Section 44 citizenship crisis and mounting pressure for a banking royal commission.

With that significant risk and Labor’s assured economic brake swept away last weekend, together with APRA this week loosening its prudential rule for lenders (particularly the 7% limb of the rule – see below), these two key factors could be enough to adequately stabilise the housing market without risking us returning to bubble proportions (with another hangover to follow).

For completeness, the APRA mortgage lending rule (in place since 2014, when mortgage interest rates were higher, closer to 7%) required borrowers to meet repayments at least the higher of:

  • a 7% interest rate, or
  • a 2 percentage points buffer above the loan’s actual interest rate.

This week’s change essentially drops the rule’s first limb above and increases the second limb to 2.5 percentage points. But with mortgage interest rates around 1 percentage point lower now than in 2014 (when the two limbs were largely equivalent), elimination of the first limb is quite a big deal, without risking much (as the buffer remains solid).

Conservatives (and classical liberals, e.g. Adam Smith) – who tend to be “restrictionists” (instinctively, as opposed to expansionists, in the prudential and macro-policy sense – see below) – would prefer the RBA to “wait-and-see” for a board meeting or two.

Restrictionists tend to err on the side of caution and have a more medium-longer term focus – i.e. they prefer to:

  • maintain budget balance over cycles and generations
  • save before spending (or gear modestly and reluctantly)
  • keep inflation in check
  • give economic agents time to respond to shocks/changed circumstances (before jumping in faithlessly with “white-knight solutions” – i.e. we do not suffer from “regulator’s conceit”), and
  • do least harm (e.g. we fear creating bubbles or negative distortions in markets).

Expansionists tend to throw caution to the wind (quipping, “Hey, in the long run, we are all dead” – says it all really!).

But, I doubt the RBA will wait. They may want to take credit for the coming rebound as well as mask Labor’s massive, negative impact on the housing market and the broader economy.

  • So many savers and investors around the country are breathing a huge sigh of relief since the weekend – doubtless this was affecting the real economy, big time!

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