- Joined
- Feb 17, 2009
- Messages
- 13,736
- Points
- 113
https://www.straitstimes.com/business/record-low-rates-doing-little-to-boost-aussie-economy
An analysis... by Mr David Richardson, a researcher at think-tank The Australia Institute, said rate cuts were less effective as they approached zero, partly because banks and financial institutions do not pass them on entirely to consumers. This is because banks do not want to offer negative rates to savers and, so, try to keep lending rates higher to maintain their profits.
Interest rate cut 3 times since June, but this has not fuelled consumer, business spending
Australian interest rates have dropped to record lows, but there are growing questions about whether such cuts - which have long been used to stimulate a lagging economy - are having any effect.
On Tuesday, Australia's central bank, the Reserve Bank of Australia, cut rates to 0.75 per cent, leaving them perilously close to negative territory. The bank is expected to make a further cut of 25 basis points before the end of this year.
Australian unemployment has risen this year from 4.9 to 5.3 per cent and growth remains relatively low, prompting the Reserve Bank to cut rates three times since June.
The cuts appear to be doing little to boost consumer spending or fuel an appetite among businesses for investment. Australian wages are stagnant and the growth rate during the last quarter of 1.4 per cent, in annual terms, was the slowest since the 2007-2008 global financial crisis.
Part of the problem is that Australians have one of the highest levels of property debt in the world, and many prefer to use rate cuts to pay off their massive property debts rather than spend their extra dollars. Average household debt is almost 200 per cent of average household income.
The low rates have also failed to boost business spending, which is at its lowest level as a proportion of the economy since 1994. This has been credited to jitters over the global economy and weak consumer spending, as well as nerves about the low rates themselves, which are in uncharted territory.
Former Australian treasurer Peter Costello said the government's focus should be on broader reforms such as tax or pro-competition changes.
"What will a rate cut do for the economy? In my view, not much," he told The Sydney Morning Herald last week.
"All these people who are holding off spending or borrowing or investing are going to say, 'I wouldn't have done it at 1 per cent, but I'm going out there now that it's 0.75 per cent?' I don't think that's going to happen."
Mr Costello added: "I think for a decade now, we've been pulling these easy levers - interest rates and spending - and we haven't been thinking enough about the hard levers."
An analysis released earlier this week by Mr David Richardson, a researcher at think-tank The Australia Institute, said rate cuts were less effective as they approached zero, partly because banks and financial institutions do not pass them on entirely to consumers. This is because banks do not want to offer negative rates to savers and, so, try to keep lending rates higher to maintain their profits.
Rate cuts after the global financial crisis in 2008 fuelled a property boom in Sydney and Melbourne, the two most populous cities. The boom finally ended in 2017.
But house prices have begun climbing again in recent months following the latest rate cuts. New figures released by property analyst CoreLogic on Tuesday found property values in Sydney and Melbourne increased by 1.7 per cent last month. Prices have shot up by about 3.5 per cent in these cities during the past quarter.
Still, there seems to be growing acknowledgement in Canberra that the federal government cannot simply rely on the Reserve Bank to try to boost growth by cutting rates.
The Reserve Bank governor, Dr Philip Lowe, told a gathering of central bankers in the United States in August that politicians around the world should take action, such as infrastructure investment and structural reform. In Australia, he has been urging the government to consider increasing spending on infrastructure projects to stimulate the economy.
"Once upon a time, when we lowered interest rates, people would run off to the bank to borrow to kind of go on a holiday or buy furniture or kind of do some spending; they don't do that anymore," he told a recent business forum in Australia.
"When we lower interest rates, they are more likely to go to the bank and say, 'Look, I want to pay off my mortgage'."
Still, that did not stop him from pulling the lever again this week. Real estate agents are expecting full houses at property inspections over the coming weeks.
A version of this article appeared in the print edition of The Straits Times on October 05, 2019, with the headline 'Record-low rates doing little to boost Aussie economy'. Print Edition | Subscribe
An analysis... by Mr David Richardson, a researcher at think-tank The Australia Institute, said rate cuts were less effective as they approached zero, partly because banks and financial institutions do not pass them on entirely to consumers. This is because banks do not want to offer negative rates to savers and, so, try to keep lending rates higher to maintain their profits.
Interest rate cut 3 times since June, but this has not fuelled consumer, business spending
Australian interest rates have dropped to record lows, but there are growing questions about whether such cuts - which have long been used to stimulate a lagging economy - are having any effect.
On Tuesday, Australia's central bank, the Reserve Bank of Australia, cut rates to 0.75 per cent, leaving them perilously close to negative territory. The bank is expected to make a further cut of 25 basis points before the end of this year.
Australian unemployment has risen this year from 4.9 to 5.3 per cent and growth remains relatively low, prompting the Reserve Bank to cut rates three times since June.
The cuts appear to be doing little to boost consumer spending or fuel an appetite among businesses for investment. Australian wages are stagnant and the growth rate during the last quarter of 1.4 per cent, in annual terms, was the slowest since the 2007-2008 global financial crisis.
Part of the problem is that Australians have one of the highest levels of property debt in the world, and many prefer to use rate cuts to pay off their massive property debts rather than spend their extra dollars. Average household debt is almost 200 per cent of average household income.
The low rates have also failed to boost business spending, which is at its lowest level as a proportion of the economy since 1994. This has been credited to jitters over the global economy and weak consumer spending, as well as nerves about the low rates themselves, which are in uncharted territory.
Former Australian treasurer Peter Costello said the government's focus should be on broader reforms such as tax or pro-competition changes.
"What will a rate cut do for the economy? In my view, not much," he told The Sydney Morning Herald last week.
"All these people who are holding off spending or borrowing or investing are going to say, 'I wouldn't have done it at 1 per cent, but I'm going out there now that it's 0.75 per cent?' I don't think that's going to happen."
Mr Costello added: "I think for a decade now, we've been pulling these easy levers - interest rates and spending - and we haven't been thinking enough about the hard levers."
An analysis released earlier this week by Mr David Richardson, a researcher at think-tank The Australia Institute, said rate cuts were less effective as they approached zero, partly because banks and financial institutions do not pass them on entirely to consumers. This is because banks do not want to offer negative rates to savers and, so, try to keep lending rates higher to maintain their profits.
Rate cuts after the global financial crisis in 2008 fuelled a property boom in Sydney and Melbourne, the two most populous cities. The boom finally ended in 2017.
But house prices have begun climbing again in recent months following the latest rate cuts. New figures released by property analyst CoreLogic on Tuesday found property values in Sydney and Melbourne increased by 1.7 per cent last month. Prices have shot up by about 3.5 per cent in these cities during the past quarter.
Still, there seems to be growing acknowledgement in Canberra that the federal government cannot simply rely on the Reserve Bank to try to boost growth by cutting rates.
The Reserve Bank governor, Dr Philip Lowe, told a gathering of central bankers in the United States in August that politicians around the world should take action, such as infrastructure investment and structural reform. In Australia, he has been urging the government to consider increasing spending on infrastructure projects to stimulate the economy.
"Once upon a time, when we lowered interest rates, people would run off to the bank to borrow to kind of go on a holiday or buy furniture or kind of do some spending; they don't do that anymore," he told a recent business forum in Australia.
"When we lower interest rates, they are more likely to go to the bank and say, 'Look, I want to pay off my mortgage'."
Still, that did not stop him from pulling the lever again this week. Real estate agents are expecting full houses at property inspections over the coming weeks.
A version of this article appeared in the print edition of The Straits Times on October 05, 2019, with the headline 'Record-low rates doing little to boost Aussie economy'. Print Edition | Subscribe
